Court undermines green credit market

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A fundamental disagreement over ownership of green power certificates has shaken the brand new renewable energy market to its core in the Netherlands. While the legal system tries to work out how the new law is supposed to work, wind plant operators are considering what their best tactical move might be against a mighty utility front

The Netherlands is so far the only country to not only have launched a national market for trade in green power credits, but also to be using fiscal instruments to stimulate demand for green power rather than placing an obligation on sellers of electricity to include it in their supply portfolios. With the eyes of energy policy makers worldwide firmly fixed on this experiment it is with consternation that they have already found themselves witnessing a precedent setting legal battle over green credit ownership. Whether the court case represents teething troubles, or is a reflection of fundamental flaws in the Dutch green power market, remains to be seen.

Many in the Dutch wind sector fear the decision by the Utrecht court could strangle the infant Dutch renewables market at birth. It instructed the operator of the Haringvliet wind farm to hand over its green certificates to the local power company, Eneco, thus removing the potential for income from green credit trade from the operator and giving it to the utility instead. The ruling looks to have revealed a major flaw in government plans to create a free market for green power.

Under legislation effective from July 1, Dutch renewable energy producers are said to generate two separate tradable commodities: physical power and green certificates. The certificates record the power supplied to the net and can be sold to power retailers as green credits. Retailers can then sell the green electricity represented by the credits to consumers, who, as of July 1, are free to shop around for green power.

This mechanism, in combination with an ecotax on grey power establishing retail price parity between green and grey electricity, will provide an elegant "free market" solution to the problem of stimulating renewables production, hopes economics minister Annemarie Jorritsma. Producers can sell to the highest bidder, new market parties will emerge to challenge the traditional utility control of the power market and the consumer will be able to buy clean power at competitive prices.

The legislation, however, makes no allowance for the fact that most of renewables electricity in the Netherlands comes from privately owned wind farms which are tied into long term contracts with the major power companies. The Windpark Haringvliet in Bunnik is typical in this respect. In 1997 it signed a ten year contract to sell its power to Eneco for NLG 0.13/ kWh excluding sales tax.

The new law stipulates that green certificates are the property of the renewable energy producer and can be freely traded by the producer. In court, Haringvliet claimed that its existing contract covered only the physical power and that it was entitled to sell its certificates to the highest bidder. Eneco disagreed. It pointed out that it was unable to sell its Haringvliet power as green electricity without the certificates. As a result it sued the wind farm for breach of contract. With grey power available at an average price of NLG 0.08/kWh, the higher price in the contract with Haringvliet reflected the green added value of the power purchased, the power company argued. The court agreed with Eneco, ruling that in contractual terms, the new green certificate was an "unforeseen circumstance," and ordering Haringvliet to hand over its certificates to Eneco on pain of a NLG 10,000 daily fine.

At the same time the court acknowledged that with the green certificate representing a tax benefit of NLG 0.1285/kWh to Eneco, the likely value of a certificate would be considerably more than reflected in the existing contract. Consequently it instructed the two parties to negotiate further on the price to be paid for the certificates.

The worst possible verdict

For new power retailers hoping to break into the market by undercutting the green power prices of the utilities, this is the worst possible verdict, believes John Appeldoorn, one of the founders of Energie Concurrent, an internet-based power marketer. Energie Concurrent offers consumers green power for NLG 0.01/kWh less than that offered by their local power companies and was hoping to secure capacity by offering wind plant operators top prices for their certificates. The ruling means that, "There will never be an open market, or at best, a half-open market," says Appeldoorn.

"At the moment we have 4500 customers and capacity for 10,000 customers. With our present growth rate our supplies will be exhausted by the end of the year and then it will be difficult to find new capacity as we are not allowed to buy green power abroad. I'm an optimistic person and I think we will find some new capacity -- because we offer the best price -- but it will be difficult and this is a serious blow to the market."

Axel Posthumus is co-founder of the E-Connection energy consultancy, which acts on behalf of Haringvliet. He believes the ruling has dealt a body blow to the new market. "The legal precedent that the certificates belong to the power companies has effectively weakened the wind farmers' negotiating position and undermined the working of the market," he says. "Now we're stuck in the middle. Instead of ruling whether existing contracts include or exclude certificates, it has further confused the issue by ruling that [wind farms] have to hand their certificates over and at the same time [the utilities] must pay more."

Posthumus is head of the Green Utility Company, a body set up a year ago to guide wind farmers through contract discussions and to act as certificate trader on their behalf. He is in no doubt about the wider implications of the ruling. "The problem is that if wind farms are required to hand over their certificates automatically, then there is a danger that the power companies will make new prices conditional on extending the contracts, which means that there will never be a free market in green power."

The war continues

But the struggle is far from over believes Posthumus. "We may have lost the battle, but not the war. It all depends on what the independent producers decide to do now. If they say, we will take the risk of dissolving our contracts and acting for ourselves, then the whole situation changes. And it's clear that the Windunie co-operative, for example, which was set up for the purposes of collective bargaining by Noord Holland wind farmers, knows that if it goes into negotiations and accepts a reasonable price then it will be out of the market for the next ten years."

In the meantime, Haringvliet's appeal against the Utrecht ruling is due to be heard in Amsterdam on September 13. "Basically our argument that the utilities are making an excessive profit on a product which they are able to secure thanks to their monopolistic position has still got to be answered," says Posthumus.

Koen Krikke, green portfolio manager for the Netherlands' biggest utility, Essent, agrees with Posthumus's market analysis. "It is, of course, true that there is at this moment a very good market situation. Certainly if you are able to put free renewable energy on the net you are in a very interesting position." But, he argues, wind farmers can't have it both ways. "Most independent power producers want long term price security, which is what they've got at the moment." Nor does he concede that utilities are picking up green certificates on the cheap. "The market consists of a lot of long term contracts and the contracts of this year are different from last year -- where should you make the comparison when there is no fixed market price?"

Transition troubles

Krikke agrees that the law could have been better formulated. "We are currently in a difficult market transition and there are clearly issues which need to be discussed. Unfortunately there are always a lot of people who are interested in a mess and the situation is being complicated by the activity of consultants who are persuading wind farmers that they are getting a poor deal," he complains. "Generally we have a very good relation with our producers and we really want to work as closely as possible with them to develop new projects and replace old turbines, and so of course we are always prepared to sit around the table and talk. All we ask is that the bodies with whom we negotiate have a formal authorisation from the wind farm owners."

Axel Posthumus laughs. "He's talking about us. The Green Utility Company operates a bit like a trade union in that we are authorised to negotiate on behalf of our members, but have to get out members' approval before we can conclude a deal. The situation is so unclear we have to negotiate about negotiating. Still at least Essent is prepared to talk." One of those represented by the Green Utility Company is Kees Schouten, a member of the West Fries Windmolen Co-operative and director of the Windwijzer wind farm. His local power company, NUON, had 133 MW of contracted capacity at the end of last year and is the utility with the most at stake. So far it has adopted the hardest line on the certificate question.

"In June we received a letter from NUON instructing us to name them as our supplier and hand over our certificates or else they would end our payments," says Schouten. NUON wrote: "We would like to draw your attention to the presence of parties in the market who are spreading the rumour that a green certificate is a separate tradable right, which is distinct from existing rights. This is not so. The green certificate is nothing more or less than a proof that a certain amount of electricity has been generated. You have a long term contract with us for your wind energy and on the basis of that contract you are required to hand over your certificates to us."

A contract is a contract

An indignant Schouen comments: "Their basic attitude is might is right. There has been no indication that they are prepared to negotiate. We have thought about dissolving the contract and setting up as traders ourselves." The additional administrative costs of becoming market traders, about EUR 2500 a year, have so far proved a barrier to that route, however. "Now we are waiting for the results of the Green Utility Company negotiations -- and from our perspective the Utrecht court's instruction that Eneco negotiate on a certificate price is of course very encouraging."

NUON, however, is giving no indication that it is prepared to soften its approach. Paula van de Kamp, speaking on behalf of NUON renewables director Annemarie Goedmakers is unapologetic. "We have drawn up long term contracts with the wind farmers which clearly show that we are paying a premium price for renewably generated power, so we are paying for the greenness of the electricity. As far as we are concerned the certificates belong to us." Nor is NUON prepared to negotiate on price, she says. "It is possible that a green certificate market will develop that will drive up the [certificate] price, but that is uncertain, and in any case the certificates are contractually ours."

Looking to the future, Van de Kamp foresees difficulties in finding new wind contracts within the Netherlands. "Obviously we will have more competition which gives us another reason to make further investments in our own production." NUON is currently building some 100 MW of wind capacity in five new wind farms, four of which are in Germany, including a 40 MW plant in Karlstadt. Ironically, the most immediate effects of the liberalisation of the Dutch green power market could be to further boost Germany's installed capacity.

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