House of Lords - European Union

Select Committee on European Union Written Evidence

Memorandum by Ms Kathryn Emmett

SUBJECT

Review of the proposal for a directive on the promotion of the use of energy from renewable sources (COM(2008) 19 final) published by the European Commission on 23 January 2008 (the "Draft Directive") and of the draft report of the Rapporteur of the Committee of the European Parliament on Industry, Research and Energy, Claude Turmes MEP, in relation to the Draft Directive published on 13 May 2008 (the "Turmes Report").

1. INTRODUCTION

The Draft Directive (defined above) published by the Commission is currently under scrutiny by the European Parliament. As part of this process, the Committee on Industry, Research and Energy (ITRE) of the European Parliament has appointed Claude Turmes MEP as its Rapporteur. The Turmes Report (defined above) proposes amendments to the Draft Directive. The Turmes Report is now itself the subject of debate and amendment in the ITRE Committee.

This briefing note considers the mechanisms for trading renewable energy between EU member states under the Draft Directive and the Turmes Report. These are intended to provide flexibility to member states in meeting their renewable energy targets. This note does not consider the provisions relating to renewable energy produced in countries outside the European Union.

Considerable detail in relation to the flexibility mechanisms is provided in the sections below. However, the principle mechanisms proposed in the Draft Directive and in the Turmes Report are outlined in summary here.

1.1 Summary

The Draft Directive creates a new tradable good, the Guarantee of Origin (GO). This represents 1MWh of renewable energy. GOs perform three functions:

(i) disclosure,

(ii) target accounting, and

(iii) provision of a mechanism for installations in one member state to access to the national support scheme of another member state.

GOs are issued to producers of renewable energy and may be traded by companies nationally or internationally. However, a company must submit a GO for cancellation when the production of energy represented by the GO receives the benefit of a member state's national support scheme. Following submission for cancellation, GOs may be traded between member states and may count towards the achievement of a member state's renewable energy targets. Direct sales of GOs from companies in one member state to another member state itself may also be possible.

Key issues relating to the Draft Directive being discussed in at the European level are:

— the implications of trade for national support schemes;

— the degree of flexibility that member states and persons should have in trade; and

— the legality of trade restrictions.

The Turmes Report uses four flexibility mechanisms:

(a) Transfer Accounting Certificates (TACs) represent 1MWh of renewable energy. They are transferred between persons and, when cancelled (usually when the production of energy represented by the GO receives the benefit of a member state's national support scheme), TACs may count towards a member state's target. A key feature of TACs is that member states have discretion to opt-in and elect to permit TAC transfers by companies.

(b) Trades between member states to meet national targets are statistical transfers of renewable energy by volume calculated on the basis of EUROSTAT data.

(c) Member states or persons may invest in projects in another member state (the host country). In this case the host country will arrange for a statistical transfer to the investing member state or issue TACs to the private investor.

(d) Two or more member states may agree on joint target compliance for example by opening up their national support schemes to energy produced in other member states or by establishing a regional, harmonised support mechanism.

GOs, used today for disclosure purposes as evidence of the green origin of renewable energy, are maintained for this purpose alone. Instead, TACs fulfil the target counting function of GOs under the Draft Directive. Importantly however, TACs do not entitle an installation to benefit from another member state's national support scheme, unlike GOs under the Draft Directive.

A more complete description and analysis of the provisions of the Draft Directive and the Turmes Report is found below.

This note is structured as follows:

— Section 2 outlines of the proposals for trading in the Draft Directive and highlights perceived uncertainties in their operation;

— Section 3 provides a summary of the main issues in relation to the flexible mechanisms being discussed at European level; and

— Section 4 outlines of the proposals for trading in the Turmes Report and highlights perceived uncertainties in their operation.

2. REVIEW OF THE DRAFT DIRECTIVE

The Draft Directive envisages the virtual, electronic trading by member states and persons of Guarantees of Origin (GOs). GOs may count towards a member state's renewable energy targets. GOs are not intended to replace national support schemes but instead provide a harmonised framework for the transfer of renewable energy in the European Union.

2.1 The instrument, compliance and administration

— GOs perform three functions under the Draft Directive: i) disclosure; ii) target accounting and iii) access to national support schemes. With respect to this last function, GOs are understood to provide a mechanism for an installation in one member state to access the national support scheme of another member state (see further below).

— GOs are issued by a member state following a request from a producer of renewable energy (article 6(1) Draft Directive). Requests are assumed to be voluntary although, upon transposition, member states might require the issue of a GO where the benefit of a support scheme is sought.

— GOs are issued in respect of:

(a) electricity produced from renewable sources; and

(b) heating or cooling produced from renewable sources.

— GOs represent 1MWh of renewable energy (article 6(1) Draft Directive). There is no differentiation of GOs by technology type, although member states may provide for this when integrating GOs and their national support schemes.

— Progress towards the national 2020 renewable energy targets are continuously tested against an indicative trajectory calculated in accordance with Part B of Annex 1 of the Draft Directive. Failure of a member state to meet the indicative trajectory has implications for trading of GOs (see further below).

— In each member state a competent body is appointed responsible for the issue and cancellation of GOs, recording of GO transfers and compiling of annual reports (article 7(1) Draft Directive).

— Although not express in the Draft Directive, it is assumed that GOs are issued by the competent body of the member state where the renewable energy was actually produced to allow verification its renewable origin.

— A register of GOs held by persons is required (article 7(3) Draft Directive). Although unclear, it is presumed that a register is also required at member state level to administer GOs submitted for cancellation by persons and to facilitate trade between member states.

— GOs may only be presented for cancellation within one year of their date of issue (article 8(3) Draft Directive). Interpretation of articles 8 and 9(1) of the Draft Directive suggests that this time limit applies to both transfers by persons and member states, although this should be confirmed.

— No mechanism for the banking of surplus GOs exists which may lead to limited liquidity and GO price volatility. However, this also ensures that trading will take place on a continuous basis and will not be back-ended to the compliance date.

2.2 Integration of GOs with national support schemes

GOs operate alongside national support schemes. Questions of their integration with national support schemes arise upon their issue and cancellation. Article 8 provides for the mandatory submission of GOs for cancellation in three circumstances:

1. Where the renewable energy represented by a GO has received support from feed-in tariff payments, premium payment, tax reductions or payments resulting from calls for tenders, that GO is to be submitted to the competent body of the member state which established the system of support (article 8(1)(a) Draft Directive);

2. Where the renewable energy represented by a GO is used to count towards a renewable energy obligation, that GO is to be submitted to the competent body of the member state which established the obligation (article 8(1)(b) Draft Directive); or

3. Where a supplier or consumer uses the GO as evidence of the share of renewable energy in its energy mix, without claiming the benefit of a support scheme, that GO shall be submitted to the competent body of the member state in which the energy in question is consumed (article 8(1)(c) Draft Directive).

The Draft Directive does not prescribe that submission of a GO for cancellation must be to the competent body of the member state where the renewable energy is produced. This offers the possibility of a producer in one member state obtaining the benefit of the national support scheme of another member state. Following submission for cancellation a GO becomes the property of the member state and may either be cancelled by that member state and count towards its national renewable energy target or be traded with another member state (General Secretariat of the Council of the European Union, 2008).

The mechanics of integration of the GO regime with national support schemes will be determined by each individual member state, however some general observations are appropriate.

2.2.1 Integration with a feed-in tariff regime

— Upon receipt of a feed-in tariff payment, a producer must submit its GO for cancellation. This avoids double payment for the same unit of energy. However, unless producers may opt-out of the national feed-in tariff regime, producers will always be required to surrender their GOs and will not participate in GO trading.

— The mechanics of allowing a producer in another member state to benefit from a member state's feed-in tariff require further examination with a focus on the legal and regulatory obstacles. Where a producer seeks to obtain the benefit of a feed-in tariff in another member state without any physical sale of energy, it is unclear how the producer may benefit from the feed-in tariff of another member state without the transaction being characterised as a trade of GOs.

2.2.2 Integration with a quota obligation

— Whilst integration will be determined by each individual member state, it is possible that some will allow GOs to be presented by a person as evidence of compliance with a renewable energy obligation. In this case GOs are submitted for cancellation to the competent body of the member state which established the obligation.

— It is assumed that a GO will be issued to national producers to the exclusion of the national tradable green certificate (such as a ROC) to avoid double payment of support. Alternatively, other means of avoiding a double payment may be implemented (for example mutually exclusive coupons to be redeemed nationally or internationally).

— Where the national tradable green certificate is banded (as is the case with ROCs), member states will have to devise a mechanism to integrate GOs with their banded national instrument. For example, a technology specific exchange rate may be necessary to convert GOs to ROCs for calculating compliance with the RO. Where a technology is entitled to a fractional national tradable green certificate, a producer may prefer to trade GOs internationally and receive support from a more favourable scheme, rather than participate in the national market depending on the difference between the level of support available nationally and internationally.

— In order to benefit from the quota obligation support scheme of another member state, a producer may sell its GO to the obliged actor in the other member state or may enter into an agreement for sale with the member state itself. Again, this transaction has the appearance of a trade in GOs.

2.2.3 Lock-in

— Where an operator has submitted GOs from a particular installation for cancellation to a competent body following participation in a support scheme, GOs must be requested for all future production from that installation and all future GOs issued must be submitted for cancellation to the same competent body (article 8(2) Draft Directive).

— The operation of the lock-in provisions and their application to different market actors requires further analysis. The effect on the economic efficiency objectives of the GO regime of requiring GOs from one installation to be cancelled by the same competent body also requires further consideration. These provisions would appear to create national GO markets, rather than a single EU-wide market.

2.3 Trading

Trades of GOs are permitted:

(a) by a member state to a member state (article 9(1) Draft Directive);

(b) by a private person to a private person (article 9(3) Draft Directive); and

2.3.1 Trading between member states

— A member state may transfer GOs submitted to its competent body for cancellation to other member states. The competent body of the receiving member state will immediately cancel the GO. Upon cancellation, the quantity of renewable energy represented by the GO shall count towards the receiving member state's national target. This same quantity is deducted from the transferring member state's renewable energy balance. (Article 10 Draft Directive).

— This trade is subject to restrictions. In order to sell GOs, a member state must equal or exceed its indicative trajectory in the immediately preceding two-year period (article 9(1) Draft Directive). As a result, trades of GOs by member states are not expected until 2013 when progress towards national targets can be assessed.

2.3.2 Trading between persons

— Trades may take place between persons within the same member state or between persons in different member states.

— International trades between persons are permitted provided the GOs traded are issued in relation to energy produced by installations which became operational after the date of entry into force of the directive (article 9(3) Draft Directive), although capacity increases after this date are treated as new installations (article 11 Draft Directive). It should be clarified whether GOs are issued to old and new installations but trades only permitted in respect of new installations. It should also be clarified whether this restriction also applies to national trades.

— Further restrictions on international trade may be imposed at the discretion of member states (article 9(2) Draft Directive). Imports may require a system of prior authorisation if, in the absence of this system, the transfer of GOs is likely to:

(a) impair the member state's ability to ensure a secure and balanced energy supply; or

(b) undermine the achievement of the environmental objectives underlying the member state's support scheme.

With respect to exports, prior authorisation may be required for the grounds at (a) and (b) above. In addition, member states may require a system of prior authorisation if, in the absence of it, the transfer of GOs is likely to:

(c) impair a member state's ability to comply with its renewable energy target set out in article 3(1) of the Draft Directive or so as to ensure that the member state equals or exceeds its indicative trajectory.

It should be clarified whether existing GO trades will be grandfathered and that these restrictions may not be applied to installations which have already engaged in GO trades before their introduction.

— In all cases, member states will have to justify the imposition of these restrictions in accordance with the single market provisions of the EC Treaty.

2.3.3 Trading by a person to a member state

— Direct international sales from operators in one member state directly to another member state may be permitted. The General Secretariat of the Council of the European Union (2008) envisage that the financial support resulting from this trade may be different from that given to national renewable energy production if this can be objectively justified. Clarification should be sought.

3. KEY DEBATES IN RELATION TO TRADING UNDER THE DRAFT DIRECTIVE

The implications of trade for national support schemes

Flexibility

The legality of trade restrictions

4. REVIEW OF THE TURMES REPORT

The primary objective of the changes introduced by the Turmes Report is to maintain flexibility in meeting the 2020 targets whilst ensuring member states retain control over progress towards their targets. A key concern is to protect consumer interests by restricting wind-fall profits and to maintain the integrity of national support schemes (Turmes, 2008). Given the recent publication of the Turmes Report, little supporting material is available to assist interpretation of its provisions.

4.1 Overview of the flexible mechanisms

The Turmes Report envisages the following "flexible mechanisms" for achieving the 2020 targets:

(a) Transfer Accounting Certificates (TACs) are transferred between persons and, when cancelled, may count towards a member state's target (article 6a(1) and article 9(1b)(a) Turmes Report). Although it is not explicit in the Turmes Report, it is understood that TACs are used merely for target accounting purposes. Therefore, unless TACs are adopted by a group of member states and integrated into a regional support scheme, TACs will not by themselves entitle an installation to benefit from the national support scheme of another member state. Domestic support may however be available.

(b) Trades between member states to meet national targets are characterised as statistical transfers of renewable energy by volume calculated on the basis of EUROSTAT data (article 9(1b)(b) Turmes Report).

(d) Two or more states may agree on joint compliance for example by opening up their national support schemes to energy produced in other member states or by establishing a regional, harmonised support mechanism (article 9(1b)(d) Turmes Report).

GOs are used for disclosure purposes only and their use in trade on voluntary markets is therefore preserved (article 6(1) Turmes Report). GOs and TACs are administered by the same competent body in each member state and in a similar fashion to the mechanisms envisaged under the Draft Directive (article 7 Turmes Report). The Turmes Report expressly prohibits the issue of TACs and GOs by a competent body in respect of renewable energy generated in another member state (article 7(3a) Turmes Report).

A significant change introduced by the Turmes Report is that the indicative trajectories contained in the Draft Directive have been restated as mandatory minimum interim targets (article 3(2) Turmes Report). Article 10a introduces penalties for non-compliance.

4.2 Guarantees of Origin

— GOs are electronic, tradable certificates representing 1MWh of renewable energy (Article 6(1) Turmes Report). Their sole function is for disclosure of the origin of renewable energy and they do not count towards the renewable energy targets. Any trade envisaged appears to be between persons on the voluntary markets including labelled green products such as green energy tariffs (RECs International, 2005). It is unclear whether a trade in GOs must accompany the physical sale of energy. GOs are issued at the request of a producer of renewable energy (article 6(1) Turmes Report) although member states must make their issue mandatory if the energy has received the benefit of a support scheme (article 11a(1) Turmes Report).

— The export of GOs may be restricted by member states if a GO has received support from a national support scheme (articles 6(4b) Turmes Report).

— GOs must be submitted for cancellation when a supplier or consumer uses them to prove the renewable origin of their energy mix (article 8(1)(c) Turmes Report). In this case the GOs are submitted to the competent body of the member state in which the energy in question is consumed and immediately cancelled (articles 8(1)(c) and 8(2) Turmes Report). GOs may only be submitted for cancellation one year after their date of issue (article 8(3) Turmes Report).

— Article 8(2a) of the Turmes Report provides for the removal of an equivalent amount of renewable energy, for the purposes of disclosure only, from the register upon the cancellation of the GO. The rationale for this provision is unclear.

— Member states may require the relevant supplier or consumer to surrender any TAC issued in respect of the renewable energy represented by the GO when the GO is surrendered (article 8(1a) Turmes Report). Although unclear from the Turmes Report itself, it is understood that this is to ensure the additionality of renewable energy used for green energy products. How this provision will be enforced where GOs and TACs are issued to producers and may be transferred separately to suppliers and consumers is unclear.

4.3 Transfer Accounting Certificates

— TACs are electronic instruments representing 1MWh of renewable energy which may be transferred by persons (article 9(1b)(a) and (c) Turmes Report), either in association with or separately from the underlying physical energy they represent. Transfer is presumed to be permitted both between persons in the same member state or between persons in different member states. Upon cancellation, TACs may be used by member states to count towards national renewable energy targets (article 2(ag) and article 10 Turmes Report).

— TACs, like GOs under the Draft Directive, are issued upon request from a producer of renewable energy (article 6a(1) Turmes Report). Requests are assumed to be voluntary although, upon transposition, member states might require the issue of a GO where the benefit of a support scheme is sought.

— In contrast to the GO regime under the Draft Directive, the TAC regime is also voluntary at the member state level (article 9(1b)(a) Turmes Report) and so the market is described as an "opt-in" scheme. It is assumed that a member state may also opt-out again (suggested by the language of article 8a(1)) and that existing transfer arrangements will be grandfathered, however, this is not clear from the language of the Turmes Report.

— Transfer of TACs is only permitted by installations which became operational after the entry into force of the directive (although it is assumed that extensions in capacity are treated as ""new" installations and that the amendment of the cross-references in article 11 Turmes Report was intended). Transfer by persons is prohibited where member states have not exceeded their mandatory interim minimum targets for the two-year period immediately preceding the period for which the transfer is valid. This latter restriction did not apply to persons under the Draft Directive, applying only to trades of GOs by member states. This arguably introduces considerable uncertainty as to whether TAC transfers will be possible and will require constant monitoring by companies of a member state's progress towards its targets. (article 9(1b)(a) Turmes Report)

— In addition, member states may require prior authorisation of international trades (imports and exports) of TACs on similar (although not identical) grounds to those applicable to GOs under the Draft Directive; namely security of supply, environmental objectives and achievement of targets (article 9(2) Turmes Report).

— TACs are cancelled if the production of the energy they represent received the benefit of a national support scheme (article 8a(1) Turmes Report). Although this provision is similar to the requirements under articles 8(1)(a) and (b) of the Draft Directive, it has been indicated that TACs will not enable installations in one member state to benefit from the support scheme of another member state. It is unclear whether the transfer of TACs would be attractive to investors if this is the case and what value (if any) a TAC would command in these circumstances.

— TACs may also be cancelled voluntarily for example to ensure the additionality of a green power product (article 8a(4) Turmes Report) but, where this is the case, may not count towards national targets (article 10(2) Turmes Report). Article 11a(2) of the Turmes Report suggests that there are circumstances when cancellation under article 8a(4) is mandatory. Clarification of this provision is needed.

— Member states may also require the equivalent GO relating to the energy represented by the TAC to be submitted for cancellation (article 8a(2) Turmes Report). This may be to ensure that the renewable energy does not benefit from both national support and payment from the voluntary markets.

— The lock-in provisions applicable to GOs under the Draft Directive apply equally to TACs (article 8a(3) Turmes Report). A derogation permitting TACs to be submitted for cancellation to competent bodies in other member states is allowed however to allow regional markets to develop or where consolidation of targets has been chosen (Article 9(1c) Turmes Report).

4.4 Other flexible mechanisms

— Trading between member states takes place by statistical transfer (article 9(1b)(b) Turmes Report). These transfers shall be taken into account in the calculation of a member state's compliance with its renewable energy targets (article 10(1b) Turmes Report).

— Transfers are limited to the total volume of energy from renewable sources which has benefited from a support scheme operated by the transferring member state and are only permitted if the member state has exceeded its mandatory interim minimum target in the two-year period immediately preceding the period for which the transfer is valid (article 9(1b)(b) Turmes Report).

— Member states may invest in joint projects in another host member state and may count an agreed proportion of the renewable energy produced towards their targets. Member states may only act as host for a joint project if they have exceeded their interim targets in the two year period immediately preceding the agreement for a joint project in an amount equivalent to the volume of energy to be produced by the joint project. The rationale for and operation of this restriction are unclear. (Article 9(1b)(c) Turmes Report)

— Investment by persons in joint projects may also be permitted with TACs awarded to investors (Turmes, 2008). However, because TACs are not intended to allow installations access to the support schemes of other member states, it is presumed that private investors will seek the benefit of the local support scheme and will then surrender their TACs to the host member state's competent body in accordance with article 8a(1) Turmes Report. It should be clarified whether in this case the TACs may carry an entitlement to support in another member state perhaps under a special agreement between the investing and host member states.

— Member states may also agree to consolidate their targets, allowing for regional renewable energy markets to emerge (Article 9(1b)(d) Turmes Report).

References

Commission (2008) Address of Mr Hans Van Steen to the European Parliament ITRE Committee meeting of 28 May 2008, Brussels, Belgium.

EWEA (2008) EWEA briefing for MEPs on Flexibility and Guarantees of Origin in the Directive on the promotion of the use of renewable energy sources. EWEA [Online]. Available from: www.ewea.org

General Secretariat of the Council of the European Union (2008) Memorandum regarding the Proposal for a directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources—Technical clarifications on Guarantees of Origin and transfer schemes. 7263/08. 11 March, Brussels, Belgium.

RECs International (2005) The use of the Guarantee of Origin. RECs International [Online]. Available from: www.recs.org

Turmes, C (2008) Address of Mr Claude Turmes, Rapporteur, to the European Parliament ITRE Committee meeting of 28 May 2008, Brussels, Belgium

24 June 2008