Green credits from cradle to grave

From January 1, owners of wind turbines in Denmark will be paid for their electricity in two forms: a fixed price of DKK 0.33/kWh and a Renewable Energy Certificate, which they can sell at a price determined by a market (within politically set limits of DKK 0.10/kWh to DKK 0.27/kWh). For a certificate, or green power credit, life promises to be exciting, with several stopping places along the way to its final resting place.

Like all markets the green credit market has a demand side and a supply side. The two forces meet on an exchange where the certificates will be the centre of attention in the wheeling and dealing process of modern financial markets. A price will be set according to the law of supply and demand, much in the same way as prices are fixed on a stock exchange.

But before a certificate reaches this turbulent stage it goes through a maturing period. A certificate is conceived when a wind turbine has produced a specific amount of electricity, say 1 kWh. It is brought to life by an "issuer," most likely the electricity system operator or the grid company since these entities know the level of renewable energy production. Every certificate will be assigned a date of issue, but not necessarily a maturity date. It will be registered and deposited on a producer account in a bank or Depository Trust Company, where it will be held until the day it is sold on the market.

Demand for certificates is being stimulated by government, which has ruled that all consumers must buy 20% of their electricity from renewable sources by end 2003. Today, renewable energy covers some 12% of Danish electricity needs. The consumers-or their representatives in the form of companies with a remit to supply electricity, which a consumer is free to choose-will also have a green credit account in a bank or Depository Trust Company. This is where the certificates will end up after being sold by producers.

A registry will supervise the producer and consumer accounts. In order to keep track of every certificate's location in the system, each one will have a serial number. The registry will also be a helpful institution for politicians to make sure that the dictated quota is being met.

The fact that a certificate may not have a maturity date does not mean it lives forever. Consumers will meet their obligation by handing over certificates to an institution, such as the Danish Energy Agency, which then destroys them.

Spot market

Creating a spot market, where the payment and the delivery of certificates happens simultaneously, before January 1 is a challenge indeed. Most likely it will also be necessary to create a forwards market-a market for future delivery of renewable energy at a predetermined price. That will require a great deal of financial engineering.

Such a market will most likely be based on trade in derivatives, for example financial futures or options. These have been around for years and have recently been introduced into NordPool, the Nordic electricity market. But it takes time to set up trading and nobody seriously believes it will be in place and effective for the first couple of years. It sounds complicated, and it is, but the individual turbine owner does not need to understand the market to participate in it as long as his bank or broker does. What the turbine owner needs is the cast iron knowledge that he can secure a specific minimum price for his electricity over the period of his investment, typically ten years.