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Renewable Energy Quota and Certificate Schemes

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Overview

Renewable energy quotas, renewable obligations (RO) or renewable portfolio standards (RPS) refer to the definition of minimum shares of renewable energy sources (RES) in the energy mix of power utilities, electricity suppliers or sometimes also large electricity consumers. There is also the possibility to define sub-quotas for individual RES in order to stimulate technology diversification. These quotas are defined by national, regional or local governments and are usually increased over time in order to support the development of RES. Sometimes, these quotas apply only to RES plants that are owned and operated by the utility itself. In most cases however, utilities have the possibility to include RES plants owned by third parties in the fulfillment of their quota obligations by means of a dedicated market for renewable energy certificates (REC), often also referred to as (tradable) green certificates (TGC).

These certificates are issued for each unit of electricity produced from RES (in some cases for each unit of greenhouse gases avoided) and the sale of the certificates creates a revenue stream for the RES operators. The level of the revenues depends on the fluctuating price levels of the TGC which are traded on dedicated certificate markets. For the RES operators, the revenues from the sale of TGC are supposed to cover the differential between the costs of RES generation and the revenue from the sale of this generation on the electricity market.

Utilities on the other hand have to purchase as many certificates as they need to fulfil their RES quota and they are penalized in case of non-fulfilment. The penalty rate per missing certificate usually determines the upper level for the price of certificates. Certificate allocation can be uniform, i.e. that there is no differentiation between different RES, which favours the deployment of only the least-cost RES technologies. Alternatively, it can be banded, meaning that RES technologies with higher generation costs receive more than one certificate per unit of energy produced. This second option has the effect of developing a more diversified portfolio of RES technologies. There is also the possibility of introducing a minimum limit (“floor”) for the price of TGC in order to reduce the price risk for RES operators.



Advantages of quota and certificate schemes

The main advantage of RES quota and certificate systems is that RES policy targets can be achieved in a very cost-efficient way because the certificate prices are determined by market forces. Utilities that have to fulfil a RES quota have a strong incentive of doing this in the most cost-efficient way possible. This minimizes the overall costs of the support scheme for electricity consumers. There is also a high probability that RES policy targets will be met if there are sufficiently high penalties for non-achievement of quota obligations. At the same time, there is no risk of an uncontrolled growth of RES installations because there is no incentive to produce additional RES electricity once the quota has been met.



Disadvantages of quota and certificate schemes

Experiences of several countries have shown that the supposed cost-efficiency of RES quota and certificate schemes often does not correspond to the reality and that overall costs are often higher compared to alternative RES support schemes such as FIT (Feed-in Tariff). This is mainly due to the risks that are related to RES investments under a TGC scheme which include not only the electricity price risk but also the green certificate price risk. In some cases, RES operators attempt to hedge against these risks by concluding long-term power purchase agreements (PPA) with utilities but also in these agreements, the risks will have to be priced in to some degree. RES quota and certificate schemes are less suited for promoting a diversified energy mix as well as technological development and innovation as they tend to discourage investment in more expensive RES technologies. To some degree, this issue can be addressed by introducing a banded certificate allocation, although this leads again to the problems related to the administrative determination of RES support levels. The adoption of technology-specific sub-quotas (“carve-out”) can be an alternative.

There is also no incentive for a stronger RES development beyond the upper limit of the RES quota as otherwise there would be an oversupply of TGC and certificate prices would sharply drop. This problem has sometimes been addressed by introducing a “headroom” for the RES quota that prevents sudden drops in TGC prices. Finally, RES quota and certificate schemes also tend to favour large RES producers that can generate least-cost electricity and shoulder the costs related to the marketing of RES electricity and green certificates. In some cases, specific TGC markets have been created for small-scale RES projects.



Experiences

Several EU member states have made experiences with RES quota and certificate schemes, including the United Kingdom, Italy, Belgium, Sweden, Poland and Romania. In recent years, the United Kingdom and Italy have decided to discontinue their quota scheme and to shift to a RES support scheme based on FIT (for small-scale RES projects) and FIP (Feed-in Premiums) (for larger RES projects).



Belgium

Belgium has started in 2002 with the introduction of a RES quota system combined with tradable certificates. Certificate trading is regulated at the national level while the quota obligations are defined by the regional administrations in Wallonia, Flanders, and Brussels. Electricity suppliers have to acquire green certificates (certificats verts / groenestroomcertificaten) in order to fulfill quota obligations for the electricity they supply to final consumers. RES operators are entitled to sell their electricity production to the federal and/or regional grid operators and receive green certificates for a total duration of 10 years (20 years in the case of offshore wind energy). Depending on the RES technology (in the case of solar PV also the installed capacity), a higher number of certificates might be issued per MWh produced (“banding”). The prices for the green certificates are determined by the market. Minimum prices (floors) have been introduced for the purchase of green certificates in the different regions and on the national level. The upper limits for certificate prices are defined through the penalties for non-fulfilment of quota obligations which currently stand at 100 €/MWh.



Italy

Italy has introduced a RES quota and certificate system in 2001. RES operators are entitled to receive tradable green certificates (certificati verdi) for their RES electricity production for a total duration of 15 years. These are bought by electricity suppliers in order to fulfil their quota obligations (in 2012, the quota was 7.55%). Banding was first introduced in 2006 and modified in 2008 in order to differentiate between RES technologies. Multiplier ratios ranged from 0.8 for biogas to 1.8 for ocean energy technologies, resulting in very low compensation levels for non-mature RES technologies. Even for mature RES technologies, the development has been rather slow until recently, even with high certificate prices ranging from 74 to 85 €/MWh between 2009 and 2012. Starting from 2013, the RES quota scheme has been closed for access. RES plants that have been put into operation before the end of 2012 will continue to be eligible for payments under the green certificate scheme.



Sweden

Sweden has adopted a technology-neutral RES quota scheme in 2003 under which electricity suppliers, auto-producers and energy intensive industries are required to acquire and cancel RES certificates according to annual quotas set by the government. In the first two accounting periods, the penalty level was below (2003) or very close to the certificate prices (2004), leading to a quota fulfilment of only 77% in 2003. As a consequence, from 2004/2005, the penalty payment was fixed at 150 % of the certificate price. Another change introduced in 2006 was the extension of the validity of the certificates from 2010 to 2030 in order to improve long-term investment security. Since 2012, there is a joint certificate market between Sweden and Norway. RES producers receive certificates for a duration of up to 15 years. During the past few years, certificate prices ranged between 15 and 40 €/MWh. The Swedish RES quota system has led to an increase of the share of RES electricity from 51.2% in 2004 to 60% in 2012. During the first few years, mainly biomass power plants (and to a smaller degree hydro-power) benefitted from the scheme while in recent years, the share of wind energy has been steadily increasing. In the past, 10-15% of certificates were granted to existing RES plants that were built before the start of the RES quota scheme in 2003, leading in many cases to overcompensation, but from 2013/2014, these plants are no longer eligible. The focus on least-cost RES technologies, together a rising surplus of unused certificates in recent years, are the main reasons for the rather low certificate prices. Since 2004, quota fulfilment has always been close to 100%, although the quota targets have sometimes been criticized for their low level of ambition.



United Kingdom

In the United Kingdom, the renewables obligation (RO) scheme coupled with a tradable RO certificate (ROC) market was introduced in 2002. In 2009, the initial technology-neutral scheme was modified by adopting technology banding. The multipliers for the different RES technologies were calculated based on current costs and their expected development until 2020. As an indication, the adopted multipliers varied from 0.25 ROC/MWh for landfill gas over 1 ROC/MWh for onshore wind energy and hydro-power to 2 ROC/MWh for offshore wind energy, biogas, geothermal, PV and ocean energy. For some technologies, this approach led to overcompensation and windfall profits while for other technologies, the overall remuneration was not sufficient to stimulate their development. In general, the British RO scheme has shown a rather low effectiveness with regard to the level of achievement of annual quota targets, varying between 56-76%. For this reason, the British government decided to replace the RO scheme with the so-called Contract for Difference (CfD), starting from 2014. The RO scheme will however be still open as an option for new RES projects until March 2017, while the certificate market will continue to exist until 2037. For small and medium-scale RES with a capacity below 5 MW, a FIT scheme has been introduced in 2010.



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