Environmental Commodities and Guarantees of Origin: An Overview of the GO Markets

In the rapidly evolving landscape of global environmental policy, the markets for environmental commodities and Guarantees of Origin (GOs) have emerged as pivotal mechanisms in promoting renewable energy and reducing greenhouse gas emissions. These markets play a crucial role in the transition towards a more sustainable and low-carbon economy, facilitating the tracking, trading, and retirement of environmental attributes associated with electricity generation and carbon offset projects.

Understanding Environmental Commodities

Environmental commodities encompass a broad range of tradable certificates and credits, each representing a specific environmental attribute or benefit. These can include emissions allowances, carbon credits, and different types of renewable energy certificates (RECs). RECs, for example, certify that a certain amount of electricity (or biogases) was generated from renewable sources (waste) and is sustainable, allowing utilities and businesses to demonstrate their use of green energy. Carbon credits, on the other hand, represent a reduction in greenhouse gas emissions, which can be bought to offset a company's carbon footprint. Emission allowances refer to a system used to regulate and reduce greenhouse gas emissions. Under this system, a government or regulatory body sets a cap on the total amount of emissions that can be released by industries, power plants, and other entities within a certain time period.

Guarantees of Origin: Certifying Renewable Energy

Within the realm of renewable energy, Guarantees of Origin play a critical role. A Guarantee of Origin is a certificate that proves that a given megawatt-hour of electricity was generated from renewable sources. It is a key tool in the transparency of the energy market, allowing consumers to make informed choices about the energy they consume and support. In Europe, the GO system is well-established, governed by the European Union's Renewable Energy Directive, which ensures that the environmental benefits of renewable energy are accurately tracked and reported.

European GO Market Prices:

01-MAR-2024 at Montel Marketplace

The current market trend of European GOs is bearish for SPOT and all forward products, although the market price curve is in contango reflecting optimism in future demand growth. Crash of SPOT prices during Q3’23, Q4’23, and Q1’24 for GOs of vintage 2023 (from levels of 6.00 EUR/MWh in Summer 2023 to 1.00 EUR/MWh in Winter 2023/24) was directly impacting the forward price trend, making it bearish. The fundamental reasons behind the bearish trend in vintage 2023 GO price are several:

• Demand dropped due to the UK regulation and stop of imports of EU GOs as of April 1st, 2023;
• Further demand drop towards the end of the year 2023 due to potentially lower consumption in the EU in 2023 (speculative opinion but very likely, to be confirmed by stats – perhaps because of warm winter and demand destruction on the industry side);
• Supply increase in new renewable generation commissioning across Europe (Europe installed 18.3 GW of new wind capacity in 2023 (gross installations). Onshore wind made up 79% of new installations for a total of 14.5 GW. A record 16.2 GW of new capacity was installed in the EU-27. 82% of this was onshore (13.3 GW). Further, 2023 marks another record year for solar PV in the EU, with 55.9 GW installed across the 27 Member States, showing a 40% growth from 2022 and a doubling of the market in just two years.)
• Additional growth of supply of GOs in 2023 in the EU zone coming from the integration of CEE and Southeast European markets into AIB system.

Market Dynamics

The markets for environmental commodities and GOs are characterized by their dynamic nature, influenced by regulatory frameworks, supply and demand, and technological advancements. The price of these commodities can vary significantly based on regional policies, the availability of renewable energy resources, and the overall market demand for green energy and carbon offsetting.

In regions with robust renewable energy targets and carbon reduction commitments, the demand for RECs, carbon credits, and GOs tends to be higher. This is particularly evident in Europe, where the EU Emissions Trading System (ETS) and the European Energy Certificate GO system (EECS GO) encourage the use of renewable energy and the reduction of carbon emissions.

As we look ahead to 2024 and 2025, it is essential to examine the guarantees of origin price volatility and the factors driving it.

Factors Influencing Guarantees of Origin Price Volatility

1. Renewable Energy Targets and Policies: Government targets and policies related to renewable energy deployment have a significant impact on the demand for GOs. Changes in regulations, subsidies, or incentives can lead to fluctuations in prices as market participants adjust their strategies accordingly.

2. Renewable Energy Generation: The amount of renewable energy generation in a given period directly affects the availability of GOs. Variability in weather conditions and the expansion of renewable energy capacity can impact the supply of GOs, thereby influencing prices.

3. Market Integration: The integration of different national markets for GOs can also contribute to price volatility. Disparities in renewable energy penetration, regulatory frameworks, and trading mechanisms across countries can lead to price differentials and market inefficiencies.

4. Investor Sentiment: Investor sentiment and market speculation can introduce additional volatility to GO prices. Factors such as geopolitical events, economic conditions, and industry trends can influence investors' perceptions of the market, leading to price fluctuations.

Outlook for Guarantees of Origin Price Volatility in 2024 and 2025

As we move into 2023 and 2024, several trends and developments are expected to impact the guarantees of origin market and contribute to price volatility:

1. Continued Renewable Energy Demand & Supply Growth: The global shift towards renewable energy sources among industry and the general public is expected to continue, driving an increase in demand for GOs. This growing demand, coupled with varying renewable energy targets across regions (commissioning new renewable generation on the supply side), could lead to price fluctuations due to the imbalances in the shorter-term market (within a year).

2. Policy Changes: Shifts in government policies and regulations related to renewable energy and carbon emissions are likely to influence GO prices. New initiatives, targets, or incentives introduced by policymakers can impact market dynamics and price levels.

3. Market Integration Efforts: Efforts to enhance the integration of national GO markets and create a more harmonized trading environment may influence price volatility. Initiatives to standardize GO certificates and improve cross-border trading could affect market dynamics. Some good real-time examples are Southeast European GO markets (local GO registries) being integrated into the AIB ( Association of Issuing Bodies of Europe) and the EU during 2023, continuing through 2024 and 2025.

4. Technological Advancements: Advances in renewable energy technologies, energy storage, and grid integration could impact the supply and demand balance for GOs. Innovations that increase renewable energy penetration or improve energy efficiency may alter market conditions (for example allowing greater generation installations and consequent increase in supply of GO).

In conclusion, guarantees of origin price volatility in 2024 and 2025 are likely to be influenced by a combination of factors, including renewable energy growth, policy changes, market integration, and technological advancements. Market participants, policymakers, and investors will need to closely monitor these developments and adapt their strategies to navigate evolving guarantees of the origin market effectively in volatile markets.

Challenges and Opportunities

One of the main challenges facing these markets is the need for greater standardization and harmonization across different regions and countries. This would facilitate international trade in environmental commodities and ensure that the environmental benefits are recognized and accounted for globally.

Despite these challenges, the markets for environmental commodities and GOs offer significant opportunities. They incentivize the production of renewable energy and the reduction of emissions, driving technological innovation and investment in green infrastructure. Furthermore, they provide a mechanism for businesses and individuals to contribute to the fight against climate change, aligning economic activities with environmental goals.

Looking Ahead

As the world continues to grapple with the urgent need to address climate change, the importance of environmental commodities and Guarantees of Origin is set to grow. With increasing scrutiny on corporate sustainability practices and a global push towards decarbonization, these markets will play a vital role in facilitating the transition to a sustainable energy future. The continued evolution and expansion of these markets will be crucial in mobilizing the necessary resources and investments to meet global renewable energy and carbon reduction targets, marking a significant step forward in the collective effort to combat climate change.

Thank you for reading this article, sharing your opinion, and contacting the Author for any open interests in GOs and other environmental commodities!

Kind regards,

Aleksandar Katancevic, Environmental Commodities Trader and CEO at Stratega East Capital Advisory Ltd