It’s accepted wisdom among UK and European policy makers that one of the best ways to lower carbon emissions is through marketisation and cross-border trade. This manifests itself in the phenomenon of what can be called ‘market imagination’, where entirely new markets are created to serve particular policy goals. The problem with these types of markets is that, if designed badly, they can produce perverse outcomes. One such market is the European Guarantee of Origin system. Under this system one ‘certificate’ is created for every MWh of electricity generated from renewable sources. This market is terribly designed, and has meant that green electricity is being double sold and consumers are being mislead.
Electricity companies can use Guarantee of Origin certificates to demonstrate to consumers how much of their electricity is generated from renewable sources. These certificates can also be traded across European borders and used to claim that electricity sold in an entirely different part of Europe is ‘green’. All companies in Europe selling ‘green’ and conventional electricity tariffs are also required to use these certificates as proof of their supply. This is where the problems begin. In Norway almost 100% of electricity is generated from renewable sources yet, because a huge proportion of their certificates are exported to other European countries, Norwegian consumers are essentially consuming grey electricity with a substantial carbon footprint. As perhaps isn’t unsurprising, consumers in Norway are not aware of this issue. It is also this system which also allows over 60% of consumers in the Netherlands to purchase green electricity, yet domestic generation continues to still be very low. Electricity, under this system, is essentially being double sold and is deceiving both sets of consumers.
At the heart of the problems with the scheme is the fact that green electricity costs of generation vary hugely across Europe, and that the single market for Guarantees of Origin certificates is completely unable to take this into account. This debate has mainly been sparked by the situation in Norway, but it could equally become an issue for other countries with substantial proportions of their electricity generated from renewables. This also has implications for the green tariff market, where the two products could be sold with the same certification but completely different types of electricity. Consumers have very little way of knowing whether the green electricity they are purchasing is sourced from renewables generated from the south of Spain (where the costs of generation are far lower) or electricity generated locally (which in many countries in Northern Europe would be much more expensive to generate). There are also worrying implications for the public funding of green electricity, for example if bill payers in one country are essentially subsiding green consumption in another.
The only solution to this problem is for the European Guarantee of Origin system to be scrapped and for green certificates to be restricted to domestic markets. Unfortunately, both the Association of Issuing bodies (the organisation which manages the trading and certification in Europe) as well as RECS International (a body which lobbies for a tracked and open pan-European renewable energy market) are entirely unwilling to engage with these real concerns and have published press releases failing to recognise the potential issues for consumers.
Disclosure: This may be a bad policy… but it probably isn’t bad enough to make you consider voting to leave the EU.