Green certificates are a tradable commodity proving that certain electricity is generated using renewable energy sources (RES).
They may have guaranteed minimum prices.
The certificates can be traded separately from the energy produced.
Other three main types of RES support schemes in place in the European Union are:
- Feed-in-Premium (FIP), and
- Investment grants.
Pursuant to the CEER Report, Key support elements of RES in Europe: moving towards market integration (C15-SDE-49-03) of 26 January 2016 (p. 8, 23, 24) quota systems or certificate schemes introduce a market mechanism for setting the value of RES support.
While RES targets and penalties are set administratively, they leave certificate markets to settle the premium awarded on top of energy market prices. They expose producers to market risks including balancing responsibilities and market price.
A green certificate scheme is a support mechanism designed to provide specific RES technologies with an additional income to the market revenue by selling previously awarded certificates to an obliged party.
It is a volume-driven support mechanism with a particular renewable target, usually set as a RES-share in final consumption or explicitly in volume of produced electricity.
Currently six EU Member States and Norway have introduced such a RES support mechanism.
However, in Italy, UK, and Poland, quota systems are now being replaced by other types of support schemes, notably Feed-in Premium (FIP).
Within the scheme, market participants (typically suppliers and producers or grid operators) are given a statutory duty to annually buy and cancel electricity certificates.
The number of certificates that one is obliged to buy corresponds to the value of the mandatory renewable quota established for the current year, multiplied by the quantity of electricity (expressed in MWh) supplied annually to the final consumers.
This will create a demand for certificates.
Producers that receive certificates will earn an income from selling certificates, in addition to the income they receive from the sale of electricity.
This is intended to make it profitable for investors to invest in new electricity generation from renewable energy sources.
An electricity certificate system is a market-based support mechanism.
Different variations of electricity certificate schemes exist.
Most countries opted for an electricity certificate scheme national in scope whilst Norway and Sweden have a common certificate system in place.
Design options for green certificate schemes
The design of a quota system may vary depending on the overall objective of the system.
Common to all quota systems is that the level of support is determined by demand and supply.
Some EU Member States also apply hybrid systems, e.g. a quota with minimum prices.
Certificate prices are determined by the interplay of demand and supply for certificates.
Eligibility of certificates
Quota schemes can in principle be designed to be technology neutral or technology specific.
In a technology neutral setting, each RES technology covered by the scheme would be awarded the same amount of certificates per MWh generated and as such receive the same support level regardless of technology costs.
Under this scheme, the most cost efficient plants would be realised first.
In terms of design, this is the most straightforward approach requiring only defining the scope of RES technologies to be endowed with certificates.
More complex in terms of design are technology specific quota schemes.
By setting different multiplier for the volume of certificates awarded for each MWh produced depending on the generation technology, MS can ensure that a variety of technologies is supported within the quota scheme, e.g. by issuing immature technologies a higher number of certificates for each MWh produced compared to more mature technologies.
However, in practice an enduring volume weighted approach is made particularly difficult by the changing landscape of technological advancements and efficiency improvements in a number of RES technologies.
A RES power plant receives electricity certificates for a specific period of time (number of years can vary).
Buyers of certificates
The number of buyers of certificates may also differ from system to system.
Some countries have chosen to link the obligation to purchase certificates to the electricity suppliers.
Other countries have chosen to link the obligation to purchase certificates to grid operators.
In order to ensure a demand for certificates there must be a penalty mechanism in place when not meeting the legally required number of certificates each year.
In other words, the cost of failing to meet the legal obligation to purchase certificates must be higher than the market price for certificates.
Most countries have an administratively set rule on how to determine the level of penalty. It is usually either set annually or as a fixed price level.
Similar to a tendering scheme, the level of penalty needs to be well designed to exercise the right amount of pressure to ensure compliance.