The Guarantees of Origin market has grown steadily over the past decade in Europe offering a flexible and efficient tool to help companies achieve their clean energy goals and support the production of renewable energy. In the long-term such a market-based system helps to increase the financial viability of renewable energy projects and stimulate investments in the renewable sector, thereby pushing out lower-priced fossil fuels and contributing to achieving the EU’s energy transition. Organised markets focusing on guarantees of origin auctions are already widespread in Western Europe, but Central and Eastern Europe is also catching up. Hungary has recently announced to launch its organised guarantees of origin market to increase transparency, liquidity and to support its growing renewables sector.
What is a Guarantee of Origin?
A Guarantee of Origin (GO) is an instrument which allows electricity consumers to actively choose sustainable power production over fossil-fuel based and hence send market signals about their demand. It’s an electronic certificate proving to end-users that a specific quantity of electricity was produced via renewable energy sources.
Guarantees of origin can be registered after production and traded electronically in the voluntary market for renewable energy certificates, thus they are not tied to the physical delivery of electricity, rather they represent a claim to the environmental benefits associated with renewable power generation.
Sellers in the market are renewable power plants, buyers are primarily those companies which are committed to make their energy consumption greener. There is no fixed price for a GO, its value depends on market demand. When a company buys a GO it becomes entitled to communicate that the volume of energy consumed and backed by GO certificates has been produced from renewable energy sources. The guarantee of origin is then cancelled in an electronic certificate registry, this makes it possible to track ownership, verify claims and ensure that guarantees of origin are only sold once and that there is no double counting.
“GOs have come a long way,” says Ivar Munch Clausen, Chair of the Association of Issuing Bodies (AIB) Board during a webinar organised on the occasion of the launch of Hungary’s GO market. AIB is the body responsible for the reliable operation of energy certificate schemes in Europe. It promotes the European Energy Certificate System (EECS), which makes trade, cancellation and use of GOs standardised across AIB members.
“The idea behind guarantees of origin was of separating the physical market from the attributes connected to that physical production,” he underlines adding that it’s not an attempt to mimic the physical market in any way. Instead, the idea was to distinguish between different types of power supply and make those who have the willingness to pay extra for specific power attributes.
As Mr Munch Clausen explains, the key is always that we have a physical flow of electricity through the grid and then on the side, we have a purely financial structure of GOs with the goal of disclosure.
“This means that when I buy a power supply deal with a GO I am not saying that I procure renewable energy but that the amount of energy I consumed and an equal amount of renewable energy have been produced and I am the only one who can claim ownership for those attributes,” he clarifies.
The GO market has grown steadily over the past decade and the market is expected to double by 2025. According to AIB, last year, 835 million certificates (825 TWh) were issued.
The development of the GO market in Hungary
Based on its National Energy Strategy 2030, Hungary expects an increase in renewable energy generation and demand for green energy consumption alike. In 2020 local solar and wind generation totalled 2 TWh, which can be considered a solid volume on the regional level.
Ákos Hamburger, Head of Electricity Supervision and Licensing Department at the Hungarian Energy and Utilities Regulatory Agency (HEA) says that this trend will continue, and the country will see a steep rise, especially in solar energy production and use in the upcoming years. As Hungary’s solar and wind generation is mostly produced in the Feed-in Tariffs (FiT) scheme, the Hungarian organised GO market is going to focus on FiT producers.
As Mr Hamburger explains the preparation of the regulatory background of the GO market has been ongoing since 2013. Hungary witnessed a slowly developing GO market over the past years, but the market remained relatively small and Hungarian GOs couldn’t have been exported as Hungary was not part of the AIB Hub (a central point for transferring certificates between registries). “Still last year only 2.5 per cent of Hungarian electricity consumption was covered by GOs,” underlines Mr Hamburger.
But with the EU’s Clean Energy Package and the new RES Directive with new provisions on GOs brought the revision of the then-effective rules. In December 2020 HEA applied for AIB membership, which was approved in May last year. Last year, Hungary amended its Electricity Act. In February this year HEA become an EECS member and from 1 March Hungary was connected with the AIB Hub. As Mr Hamburger points out Hungary has a brand new regulation of electricity GOs and disclosure considering all the good practices in Europe.
Mr Hamburger underlines that hopefully, the auction will also reduce the operation costs of the KÁT system and domestic market participants will be able to use this opportunity to join the European market through the AIB Hub.
The launch of the Hungarian GO market
“There will be two phases of launching the GO market at HUPX,” says György Istvánffy, Director of HUPX Markets. The HUPX GO market will start operating with the single seller model. As Mr Istvánffy explains the Hungarian Transmission System Operator (MAVIR), as the nominated buyer of Hungarian FiT production, will be the sole seller of the related guarantees of origins via quarterly auctions, while the buyer side will be open to energy traders, end-users and other market participants.
“There is a constantly growing volume of installed capacities in the system for the FiT,” confirms the Director of HUPX Markets adding that there is a huge increase envisioned for the upcoming years as well (for the FiT it will be around 3000 MW installed capacity by 2024).
However, as a huge chunk of this capacity is coming from solar we have to factor in seasonality. Last year from the 3.9 TWh FiT production 2.6 TWh was coming from wind and solar. “Therefore there is some fluctuation in the number of offered GOs in each quarter,” adds Mr Istvánffy.
As for the future, HUPX has already planned a second phase of the organised GO market, a so-called multiple seller model.
The goal of the new GO market is to provide a transparent, non-discriminative and anonym trading environment. In addition, HUPX will offer financial clearing and settlement services in order to ensure reliable trading processes. Introducing GO markets is a great opportunity for the HUPX Group to enter the green energy market.
“The future will probably bring different set-ups for the auctions with more sellers, different technologies, and GOs that are not coming from subsidised sources, that is definitely something that we are already planning with,” says Gábor Szatmári, Head of Sales at HUPX.
Speaking about the demand side, Mr Szatmári highlights that consumers want to support the regional renewables investments, adding that anything that is actually taking place on the production side in the same country where they are consuming power, could be something of interest.
Demand is certainly increasing, as companies are pushing forward with more transparent mechanisms to reach their decarbonisation goals and on the supply side, countries are continuously increasing their RES targets.
We definitely see, especially in light of the current Ukraine war and the forthcoming price environment, that countries try to even more increase their investments in renewable energy. Depending on how national demand schemes develop, this could also have an impact on the future of the GO market.
In the future, GOs can be expanded to other energy sources as well. Gas guarantees of origins may also be introduced on the Hungarian market. The big challenge will be to keep credibility when the energy is converted from one energy carrier to another from the point when it is consumed.