Creating a system of tradeable certificates may be a step in the right direction for the promotion of small hydro power and other renewable resources. Bernhard Pelikan takes a closer look at the situation in Austria
OVER the past few decades, the promotion of small hydro power, as well as other renewables, has mainly been carried out through individual tariff systems. However, due to national differences in sources, political lobbying and public acceptance, there was little international homogeneity. The ongoing liberalisation process needs new compatible systems to meet national and international demands and interests. Creating a system of tradeable certificates may be a positive step, as it seems to offer both regulation and a free market.
The critical point about this system is that the framework conditions are usually fixed politically. A few European countries have already taken the legislative step and have now started implementation. Experiences are however limited, and the only way to learn is by taking part.
Some national legislation – for example in Austria – has set divisions between small hydro and other renewables. Small hydro will get the tradeable green certificates (TGC) system but the other renewables will keep the feed-in tariff system. When looking at European policy and goals, this does not appear to make sense.
The existence of, and necessity to promote, all kinds of renewable energy is part of public as well as political knowledge and acceptance. Promotional tools can act as a form of compensation in order to make all market players competitive within equal and fair conditions. In contradiction to this, the situation on the energy market is not based on equality in cost structure and completeness of costs – there is simply no fairness. The key, which could be capable of solving all economical problems of renewables, is internalisation of external costs. Once realised, the most attractive renewable sources can at least compete alongside non-renewables without any additional support. This puts a different spotlight on all the supporting tools for renewables because they then become compensating tools.
The following interpretation of the TGC system is based on Austrian experiences and research activities. A direct takeover in other countries could not really be successful due to different national conditions. Nonetheless, international discussion on the system should be initiated and promoted.
A TGC system is set to be implemented in Austria, Sweden, the UK, the Netherlands and Italy. At the moment, there is no knowledge of whether the certificate system is in principle suitable for renewables or at least for small hydro. Discussions on national and international levels over the last year have highlighted delicate points and the necessary conditions to implement this, but without guaranteed success.
The principle behind the system of tradable certificates is to split the value of the energy unit into a physical and an ideological part representing the sustainability of a unit of renewable generation. The physical value corresponds with the market price of energy. The ideological part – the certificate – refers to the same unit (kWh) proving the origin.
From an official European point of view, small hydro is limited to 10MW in Austria and in several other European countries The first step is the certification of the production unit – the small hydro station. Due to the fact that only energy delivered to the grid is the subject of the TGC system, grid operators have all necessary information to certify the site. The procedure itself may be carried out by governmental or non-governmental bodies.
The second step is the reliable issuing and handling of certificates. Again the grid operators may be best served having primary information. The meter readings are the basis of issuing. Furthermore it seems the most efficient way of dealing with this step is to count all production at a central body and to make green certificates electronic documents handled on an internet basis. Any producer and any supplier may have an account, offering further opportunities for marketing. Obviously, the approach to the individual accounts is limited.
Who is obliged?
To turn green certificates into TGCs, a market has to be created by setting obligations. This can be done at any point of the electricity supply chain between production and consumption. The preferred version is the obligation of consumers (the polluter pays principle) or the suppliers. Although the consumer obligation may be useful from a strategic point of view, it is hard to handle and execute. Consequently, the most easily controlled version is the obligation of suppliers.
The question of quota is extremely sensitive and has to be fixed as a variable value. Additionally, this question is closely connected with the borders of system operation (national or trans-national level). However, it does not make sense to create a wide gap between the recently existing quota and the target. Undoubtedly the gap is the driving force increasing production. On the other hand, there is a relation between the ‘temperature’ of the market and the size of the gap. The overall target is a continuous but responsible increase of renewable energy. The ‘gap’ should not be bigger than roughly 5-10% of the target, repeating the possibility to adjust the values easily and short-termed.
Any obligation which has a quota to meet its target needs some enforcement. The main aspects are the size of the penalty and how to enforce it.
Referring to the size, two models may be offered, both of them corresponding with the price of the TGC: a fixed amount added or a certain percentage added. Considering the variability of the price of the TGC following market rules, it is a clearer solution to add a certain amount fixed in advance by the government. This means that anybody obliged to do this can calculate costs precisely.
With regards to the absolute size, the additional penalty should ensure that meeting the obligation is cheaper than paying the penalty. The additional amount has to correspond with operational costs, contract costs and administrative costs. Some experiences have shown that about 50% of the price of the TGC may convince the obligatees to buy certificates instead of paying penalty.
If some of them prefer paying penalties for strategic or political reasons, the question about making use of the incoming money has to be raised. The best case may be a fund, earmarked for two purposes – buying remaining certificates and supporting the more expensive sites or resources included in a certificate system.
Within that system of return, the question of quotes becomes more important, because the bigger the ‘gap’ between certificate supply and demand, the more money will be needed to fill up the fund.
The enforcement of the obligation could be undertaken by the government of the country of the energy supply for both national and foreign supply companies. Both of them have to meet national regulations, otherwise they lose their supply permission. That seems to be a theoretical scenario because foreign suppliers will likely try to get quotas of the national market. One strategy for that aim may be to become ‘greener’ than others. To help enforce the obligation, the government may authorise a controlling body for supervision.
Prices and Trading
In theory, the price of certificates will be set by market rules (supply and demand). In practice, the price will be influenced by the market structure (individual or pooled), time restrictions, validity and strategic items.
Starting with the market structure, small hydro power is well known for having small but many units. In Austria, for example, there are about 2000 producers, 90% of them smaller the 1MW, and 50% smaller than 100kW. Most of the owners are laymen with other employment.
The counterpart is a limited group of professional energy supply companies which have market experience, valuable information and usually some financial power behind them. It is easy to understand that the differences mentioned would discriminate against producers in negotiations and contracting. The inequality could be reduced by building producer groups creating bigger dealing volumes. A second measure to ensure fairness is providing a high degree of transparency – a model similar to the stock exchange, showing the recent market situation and price movement.
As an example, the Danish system is underpinned by a guaranteed minimum price for TGCs of 0.014 Euro/kWh. That appears to be quite small, but the penalty in case of not meeting the obligation is almost 0.037 Euro/kWh, fixing a maximum price for TGCs.
Banking and Borrowing
Special features of small hydro must be considered in key decision points of the TGC system. Banking means storing TGCs produced transgressing one redemption period. The only actor of banking is the producer. If obligatees are allowed to bank, the system could be in danger of crashing. Nevertheless the period of banking should be limited according to production features of small hydro. Between ‘wet’ and ‘dry’ years the production may differ by +/-30%, which means a certificate should have a rolling validity of two years.
Following the idea of virtual marketing, it would be easy to mark the TGC with the precise production and registration date respectively. After reaching the limitation, the green certificate will be deleted automatically from the account.
The idea of borrowing meets the interests of actors having a shortfall of TGC within one redemption period (a year) and adding the difference to their target in the following redemption period. In general this idea is regarded as unacceptable, but considering production features, some extension (maximum half a year) would make sense under the condition that the TGC market was empty and the shortfall is a maximum 8% of the obligation (one month value).
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