17 October 2024

An unfortunate precedent or a future-proof solution? How can energy system models help quantify the impact of potential rules on system emissions?
Wind turbines in a field at sunset

Does the purchase of renewable energy certificates reduce system emissions? Dr Lissy Langer, Postdoc in Energy Systems Modelling at the Technical University of Denmark, and Professor Matthew Brander, Chair in Carbon Accounting at the University of Edinburgh Business School, analyse under which conditions the use of renewable energy certificates in carbon accounting and renewable fuel regulations leads to additional renewable energy and emission reductions in the overall energy system.

The current rules of carbon accounting

The current standard for carbon accounting requires location-based and market-based accounting when reporting corporate emissions from the consumption of electricity, steam, heat and cooling (referred to as ‘scope 2’) (GHG Protocol, 2015).

Figure 1 shows an illustrative example of a company with no market-based instruments (initial), with a 100 MWh power purchase agreement (with PPA), and with a 100 MWh PPA and 50 MWh renewable energy certificates (with PPA and RECs). In the example, the PPA adds additional renewable energy compared to the counterfactual (initial), while the RECs come from renewable sources that were already present in the initial case. Therefore, the total local grid emission factor (EFmix) is lower in the cases with the PPA (0.89 tCO2e/MWh compared to 1 tCO2e/MWh), but remains the same if the RECs are purchased by the company. Under the location-based method, the consumption would be multiplied by the emission factor of the grid mix (EFmix). It would therefore be the same in the two scenarios on the right and slightly lower than in the initial case (178 tCO2e compared to 200 tCO2e).

Figure 1 Market-based accounting example case with power purchase agreements (PPAs) and renewable energy certificates (RECs) (numerical example based on (Bjørn et al., 2022))

Using market-based accounting, the company’s load not covered by RECs or PPAs is multiplied by a residual emission factor (EFres) that is affected by all interventions, as the renewable energy sources claimed by the company are excluded. The resulting emissions reported by the company are significantly reduced by the use of market-based instruments.

Many corporate buyers of RECs, and households on ‘green tariffs’ backed by RECs, often believe that their actions increase the deployment of renewable energy. Figure 1 shows that if RECs are issued from already existing renewable energy sources, these can earn the additional revenues as windfall profits without introducing additional renewable generation.

The European market for renewable energy certificates (RECs)

Similar to the corporate voluntary market’s use of renewable energy certificates, utilities use RECs (also known as ‘Guarantees of Origin’ (GOs) in Europe) to report the share of renewable energy sources in their portfolios. Figure 2 shows the certificates cancelled in Germany from 2013 to 2017. The REC market in Europe would most likely have a similar structure since both are cost-driven and utilities/companies need to purchase certificates to match their annual production/demand for the share they would like to report as renewable.

Figure 2 highlights that most RECs are purchased from outside Germany, predominantly from Norway (47% in 2017), from hydropower (90% in 2017), and from generation capacity that is older than 20 years old (83% in 2017). This underlines the windfall profits being captured by existing plants and indicates the limited effect the revenue from RECs may have on renewable energy investments.

Figure 2: Cancelled RECs in Germany 2013-2017 (Umweltbundesamt, 2019)

This effect is also evident in the prices obtained for the different products in different locations. Figure 3 shows that newer capacities achieve a higher price. The cheapest RECs are issued by old generators in Scandinavia, followed by German, Austrian and repowered generators in Scandinavia. However, almost all REC prices were below 3 EUR/MWh, while the average wholesale price of electricity in Germany in 2024 was in the region of 70 EUR/MWh (Statista, 2024). The report based on the German REC data is currently being updated.

Figure 3: Price range of RECs in Europe in EUR/MWh based on Interviews in 2018 (Umweltbundesamt, 2019)

Since 2019, the European REC statistics are published collectively. Figure 4.2 shows that hydropower still dominates the RECs cancelled in Germany. However, the overall share is decreasing as the share of solar PV and onshore wind increases in Europe (Figure 4.1). Overall, Figure 4.3 shows that Germany is still the largest net importer of RECs and Norway remains the largest exporter. Unfortunately, the AIB does not publish origin-destination REC transfers nor generator ages or prices. Although up-to-date price data is not publicly available for Europe, a recent report from the UK suggests that REC prices may have risen from around £0.20/MWh before 2019 to £7/MWh based on survey data and to £4/MWh based on market data (Cornwall Insight, 2023).

Figure 4: AIB statistics 2019-2023 on 1) Top 10 fuel use in cancelled RECs overall, 2) in Germany, 3) Top 10 net importers and exporters (AIB, 2024)

The cost of renewable energy

In order to incentivize an investment decision, the certificate price would need to compensate for the price difference between alternative generators. Figure 5 shows that both wind and solar PV were more expensive than gas-fired alternatives in 2009, but by much more than 3 EUR/MWh. However, this changed for onshore wind in 2011 and for utility-scale solar PV in 2015, when both became the cheapest source of electricity (see Figure 5 highlights). Now, certificates would lead to windfall profits, not only for old but also for new generators.

Figure 5: Levelized Cost of Energy Analysis (Lazard, 2024, Figure by Mir-445511 - Own work, CC BY-SA 4.0)

Whether the purchase of certificates causes renewable generation to be built is commonly referred to as “additionality”. Different proxies and tests are being discussed to increase the likelihood of new generation being added to the system compared to a base case with no REC market. These frequently include a maximum age of the considered renewable energy sources (e.g., 3 years), and/or the prerequisite that the no additional government subsidies were received . This would already exclude most RECs in Figure 2. However, it would not exclude renewables that would have been built anyway based on the economic prospects outlined in Figure 5 and certificates from outside of Germany.

Additionality and proposed carbon accounting rules

Analysing the impact of such additionality conditions is where energy system studies can help by comparing a counterfactual model run without a REC market with a run including a REC market with specific purchasing conditions. In this way, the additionality of renewables and the impact on emissions can be quantified. We compare the results of different REC purchase conditions in energy system studies from the EU and the US in the context of corporate electricity purchasing and renewable hydrogen regulation (Langer et al., 2023). The studies considered all include an additionality proxy that considers only newly built renewable energy and focus on different temporal and spatial correlation conditions.

Currently, companies and utilities have to match their consumption with the certificates they buy on an annual basis. However, it may be the case that the company only consumes electricity at night but only purchases solar PV certificates. Figure 6 shows that, depending on the generation mix, the resulting net emissions can be very different, especially in winter.

Figure 6: CO2 emissions in the German grid mix in 2020 [kg CO2 per MWh] (EUDP Research, 2021)

Therefore, we compare the purchase of RECs from local newly built renewable energy annually and hourly matched to a given commercial and industrial (C&I) or hydrogen production profile. We find that most of studies only find significant emission reductions when supply and demand are hourly matched (Figure 7). We also highlight exceptions to the rule and explain the impact of modelling and policy assumptions on the results.

Figure 7: Comparison of indicator values highlighting the emissions impact of different electricity purchasing conditions (figure: Langer et al., 2023, studies: Ricks et al., 2023; Xu et al., 2024, 2022; Zeyen et al., 2024)

Conclusions and outlook

The effectiveness of renewable electricity certificates on the share of renewable energy sources in the system and the overall system emissions is a relevant factor given the importance of reducing companies’ emissions and considering the impact that the introduction of non-fossil fuels (e.g. hydrogen) might have in the energy transition.

However, the introduction of certificates is being discussed in various adjacent fields in connection to sustainable carbon from bioenergy used as a source of negative emissions, sustainable aviation fuels, and renewable energy carbon offsets. However, the question of additionality and the impact on science-based targets is important to answer before venturing into future application areas. Here, energy system models may help by investigating whether the additional revenue provided by certificate markets will be sufficient to cause additional renewable energy and lead to a reduction in system emissions compared to a baseline without a certificate market.

References

Matthew Brander

Matthew Brander

Personal Chair of Carbon Accounting, University of Edinburgh Business School

Lissy Langer

Lissy Langer

Postdoc, Department of Technology, Management and Economics, Technical University of Denmark