The role of Guarantees of Origin in achieving the EU renewable energy target: taking stock of the EU ETS experience

A post by Alberto Pototschnig (FSR Energy)

Since 2005, the EU Emission Trading System has been the main instrument for pursuing the reduction in greenhouse gas emissions in Europe within the sectors it covers. It does so by providing a single price signal to promote the equalisation of the marginal costs of abatement, thus fostering decarbonisation at least cost.

The same approach has not so far been adopted in pursuing the renewable energy penetration target, another goal of the EU energy and climate policy, resulting in a plethora of different national support schemes. There is, in fact, a fundamental difference between reducing GHG emissions and promoting renewable energies which led to different policy approaches in these two areas since the time of the 2009 climate and energy legislative package: while the impact of GHG emission reductions is global, and therefore the geographical structure of such reductions does not matter so much, renewable deployment brings local benefits, for example in terms of job creation and reduction in the emissions of pollutants.

However, at a time when the renewable penetration target is becoming more ambitious – with its doubling between 2020 (20%) and 2030 (40%) -, and thus the costs of achieving it are likely to be significantly higher, it may be appropriate to reconsider the trade-off between achieving the target at least cost and the potential decoupling of the geographical distribution of costs and benefits.

In fact, a system similar to the EU ETS could be adopted for promoting renewable energies. It could be based on an enhanced role for Guarantees of Origin which, both in the 2009 and 2018 Renewables Directives, have been confined to disclosure. More specific, a “tradable quota system” based on Guarantees of Renewable Origin (GROs) could be put in place in which GROs would be issued on the production of renewable energy, as defined in legislation. The achievement of the penetration target would be ensured by imposing an obligation, on large energy consumers or on suppliers serving smaller consumers, to procure and surrender an amount of GROs equivalent to a predefined share of the final energy consumption for which they are responsible. This predefined share could be the same for all consumers in all sectors covered by the GRO system, or it could be modulated to meet specific policy priorities. However, the allocation of the burden across the different consumers and sectors would not affect the cost-minimisation property of this approach. There are other flexibility dimensions for such a GRO system, related to its geographical and energy-vector coverage. Clearly, the wider the coverage, the greater the benefits in terms of cost reduction.

This approach would clearly require removing the limitation to disclosure of the role of Guarantees of Origin, but it would be fully compatible with the other flexibility instruments currently envisaged in legislation – such as statistical transfers – or with the new EU renewable energy financing mechanism and, in fact, it could support them. A GRO system applied consistently across multiple vectors would also be very much in line with the smart energy system integration strategy outlined earlier this year by the European Commission. Clearly, such a system would not deliver, by itself, a pre-defined renewable share for any of the included vectors. In order to achieve this, additional support for specific vectors/technologies might be needed. Therefore, the GRO system could be accompanied by additional targeted support, for example to promote the development of infant technologies. It should be clear, though, that such additional support, to the extent that it leads to a deviation from the mix of renewable energies delivering the renewable energy penetration target at least cost, would increase the cost of achieving that target. In this respect, the GRO mechanism could become the instrument providing the basic support for renewables and, on top of which, more targeted intervention could be provided for specific vectors/technologies, according to policy priorities.

The Florence School of Regulation is working on outlining a GRO-based system to contribute to the pursuit of the renewable energy penetration target. It already held two online public debates on 6 October and 6 November to share its thinking with interested stakeholders and will soon publish a report with a more detailed proposal.