Tuesday, 08 January 2019
2018 marked a historic year for the Guarantees of Origin (GO) market in Europe. Prices in the wholesale market for GOs reached unprecedented highs - with Nordic Hydro scraping just below 2 €/MWh in September, Dutch Wind being traded above 8 €/MWh and Swiss Hydro between 3 and 4 CHF/MWh.
With the liberalization of the energy market in Europe at the turn of the century, GOs were implemented as a tool to track renewable energy sources and thereby giving the consumer the choice between renewable and non-renewable energy sources. Hence, the use of GOs to document the source of consumed renewable energy can certainly be seen as a measure for the demand for renewable energy. Historically, the GO supply exceeded the demand by a huge margin. Thus, prices for GOs have been low (between 10 and 25 Eurocents per Megawatt hour) – except for two brief periods of time, one of which was directly after the nuclear disaster in Fukushima. In conjunction with Germany’s efforts towards the Energiewende, the nuclear accident sparked interest in green power amongst Europeans (especially German electricity suppliers). However, this upheaval in the GO world paled against the most recent GO market rally. The most traded product, Nordic Hydro is considered the benchmark in the GO market. Most other products with the notable exception of Swiss and the Dutch GOs followed its price development last year. In contrast to Nordic Wind, which is mainly consumed in other countries such as Germany, Swiss Hydro and Dutch Wind are two certificates that are almost exclusively consumed in their countries of origin and thus their price developments have different market dynamics. Nonetheless, all three markets were characterized by elevated prices in 2018.
The Nordic Hydro rally began towards the end of 2017 and came to a halt at the end of summer 2018. During this period, the market saw a 300% price increase from 0.48 €/MWh in December 2017 to 1.96 €/MWh in September 2018. Three main things coincided to cause this remarkable price surge: First, an increase in demand due to many electricity suppliers having switched to green defaults (i.e. they only offer green electricity tariffs to their customers, instead of offering the option to choose between non-green and green tariffs). Second, an ever-larger appetite among corporates to source 100% green electricity to support their ambitious sustainability strategies. Third, a reduced supply of GOs due to lower than expected hydro and wind power outputs caused by unfavorable weather conditions (it was hot and dry last summer – even in Norway).
Recovering hydropower reservoirs in the Nordics from far below normal levels caused the tide to turn again at the end of September/beginning of October. Improved reservoir levels triggered intermediaries, such as traders with long positions to cut short their exposure. Consequently, prices dropped to around 1 €/MWh in autumn, which was followed by a modest price increase in the winter to 1.24 €/MWh (closing price in December).
In the Swiss case, the price increase for Swiss Hydro was triggered by a change in legislation that came into force in January 2018. The Swiss followed Austria and Sweden and implemented a so-called ‘full disclosure’ framework and Swiss suppliers were not allowed to have a certain share of “grey” electricity (i.e. electricity from “non-verifiable sources”) in their mix anymore. This caused suppliers to rush to buy renewable GOs to green their portfolio, which pushed the prices from below 1 CHF/MWh at the beginning of 2017 up to 5 CHF/MWh at the end of 2017/beginning of 2018. After the initial market exuberance, prices stabilized at around 3 to 4 CHF/MWh during 2018, depending on the vintage year.
The market for Dutch Wind is a prime example of what is possible if several favorable conditions come together at the same time: a relatively low increase in supply, a public that is sensitive towards climate change (living below sea level can have this effect) and a well-established CSR instrument (CO2-ladder). Dutch GO prices are now trading well above 8 Euro level, up by more than 80% from 2017.
After a year of volatility - what to expect in 2019? Characteristically, we can expect growth in both the supply and the demand for GOs. The latter, however, at an accelerated pace because we have now entered a period where climate change related topics are discussed ferociously in the news. These discussions will be echoed in many board meetings of customer-facing companies, and sustainability is set to be one of the key topics in 2019. Take the RE100 for instance, a fast-growing initiative of influential businesses committed to sourcing 100% of their electricity from renewable energy sources. If they were a country, they would be the 23rd largest electricity consumer in the world. The RE100 is counting 158 members by now and it is growing by 3 to 5 new members every month, making this initiative a significant contributor to the demand for GOs in Europe. GOs are not only used by RE100 companies but have become the tool for all corporates that want to report their carbon footprints according to international standards.
For many years, the Association of Issuing Bodies, the various national Issuing Bodies and dedicated market participants have put much effort in making the GO-scheme in Europe a bulletproof system that puts the consumer in the driver seat when it comes to renewables. Now is the time when those efforts will pay off and the market enters a new and mature stage – with higher liquidity and elevated prices which are driven by the consumers’ dedication to make the world a greener place.
Alexandra Münzer, Managing Director of Greenfact AS