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WHITE & GREEN

CERTIFICATES

GRUPPO 2

Erika Torresin, Jean Emmanuel Lamarche,

Leopoldo Miotto, Marlena Lesiewicz

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INTRODUCTION

One of the most serious problems that Europe has to deal with today is energy. The

increase in energy prices and increasing dependence on energy supplies from outside

the EU are a threat for energy security and competitiveness of the EU industry. Decisive

actions have to be taken to reduce emissions and curb climate change.

Two main problems:

1) Scarcity of resources

2) Trade-off between the different functions of the environment

especially in this presentation we deal with the functions of supplier of raw (i.e. fossil fuels used to

produce electricity) materials and receptacle of waste (i.e. atmosphere pollution – CO2 emissions)

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INTRODUCTION

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WHITE CERTIFICATES (WCs): documents certifying that a certain

reduction of energy consumption is reached

GREEN CERTIFICATES (GCs): documents proving that certain

electricity is generated using renewable energy sources

TRADABLE EMISSION ALLOWANCES (TEAs): documents used to

control pollution by providing economic incentives for achieving

reductions in the emissions of pollutants, using a market-based approach

Some short definitions

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WHITE CERTIFICATES

What are they?

As explained by DIRECTIVE 2006/32/EC OF THE EUROPEAN PARLIAMENT AND OF

THE COUNCIL of 5 April 2006 white certificates (WCs) are:

“certificates issued by independent certifying bodies confirming the energy savings

claims of market actors as a consequence of energy efficiency improvement measures.”

WCs scheme not necessarily imply introducing the possibility of trading.

WCs don’t replace existing policy but aim to achieve energy efficiency in a more

cost-effective way.

How do they work?

Market actors are obliged to reach a certain amount of energy saving (the cap).

Target compliance requires submission of a number of certificates commensurate

with the energy saving target.

Market actors receive certificates for savings achieved which can be used for

their own target compliance or can be sold to obliged parties.

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WHITE CERTIFICATES

The energy saving can refer to consumption of:

electric energy;

natural gas;

other combustible.

The keys for cost-effective TWCs mechanism are:

measurement and verification (M&V);

transparent and liquid market

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TRADABLE WHITE CERTIFICATES (TWCs)

Measurement and verification (M&V)

As savings cannot be measured, the size of energy consumption needs to be compared

before and after the implementation.

However extensive and complicated M&V can be way too costly for the small and

medium-size projects. Parties have therefore developed ex-ante M&V protocols that pre-

define saving factors for each type of project. Using these methods the costs of M&V are

significantly lowered.

Graph taken from “ White Certificates: concept and market experiences”

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TRADABLE WHITE CERTIFICATES (TWCs)

Transparent and liquid market

The optimal market would have a large number of trading parties that have sufficient

information on products and prices and sufficient opportunities to trade.

Market transparency and liquidity can be enhanced by:

Exchange platforms which publish volume and price of transactions

Broadening the geographic scope of market

Allowing (limited) banking and borrowing of certificates

Providing certainty on demand

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TWCs

Benefits

1. Certifications guarantee meeting the agreed target

2. Introduction of tradability aims at least-cost achievement of targets (cost-effectiveness)

3. The system could unlock energy saving potentials and actors that are currently not

unlocked by other instruments

4. Can stimulate the market for ESCOs (Energy Service Company)

Certificates can be created from projects that result in energy savings beyond business as usual, by target

market actors or by ESCOs.

An ESCO is a business providing a broad range of solutions that aim to improve energy efficiency,

assuming all the risk related to the project, leaving the final customer free of any organizational duty. ESCO

also provides loan for the project and guarantees for the energy saving.

5. Can reduce pressures on public budgets, as expenditure for energy is reduced

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TWCs

Drawbacks

1. Might target only efficiency increases, not overall reduction of energy consumption

2. Could involve large transaction costs

3. Might favor mainly actions easy to implement and measure

4. A European system may require substantial harmonization in energy policies

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Interaction with other schemes

WCs contribute to generate additional energy saving in two ways:

reducing primary energy demand

and hence reducing greenhouse gas emissions.

Therefore a WC scheme may lower the costs of the emissions trading scheme

As targets for renewable electricity are generally formulated as a share of overall

electricity demand, the energy saving effect of WCs may also reduce the total cost

of the achievement of European targets to increase the share of renewable energy.

On the other hand, when falling electricity demand leads to falling average

wholesale prices of electricity, the costs of meeting renewable energy targets may

rise again.

A WC scheme reduces the need for energy saving subsidies, but at the same time

it reduces the revenues from energy taxes, as the taxable base reduces.

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Promotion of RES-E

There are two main measures that aim to promote the production of electricity

from renewable energy sources:

direct support system based on fixed, subsidized feed-in tariffs (FITs);

quota systems based on tradable green certificates (TGCs).

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GREEN CERTIFICATES

What are they

and how do they work?

Government set a RES-E(*) quota, that is generally assigned to retail electricity

providers, who must show that they have obtain the mandated share of their

electricity from RES-E sources.

They can demonstrate this by buying either RES-E itself or green certificates

(GCs).

A GC is a document certifying the generation of one unit of RES-E which in turn

displaces the carbon equivalent of the marginal unit of conventional electricity

generation.

A GC becomes a tradable green certificate (TGC) when the mechanism allows

trading of GCs as a means of meeting the RES-E quota.

(*)RES-E: electricity from renewable energy sources

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ADVANTAGES:

cost-effectiveness (see analogy with emissions trading);

quota system fund RES-E projects without channeling additional money through

government;

the amount of RES-E to be developed is known in advance; this imply that:

if no “opt-out” clause is included in the policy, the quota sets a minimum level of RES-E

capacity that is certain to be developed

if participants are allowed to “opt-out” of their obligation by paying a set fee per kWh, the

quota can be see as an upper limit on the amount of RES-E that will be developed and

consequently the maximum possible cost of the policy is known in advance.

TGCs

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TGCs

DISADVANTAGES:

1) uncertainty about the future price of electricity which may not be sufficient to

compensate incumbents marginal costs if more efficient firms enter the market;

2) uncertainty about the future value of TGCs;

3) due to these risks, financing for RES-E projects may be difficult to obtain or come at a

high cost;

4) shortage of capital may exclude smaller participants from the market, reducing

innovation and liquidity;

5) costs of TGCs may rise or large price fluctuations may occur if markets include too few

projects or traders and become illiquid;

Points 3) to 5) may cause a vicious cycle

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TGCs

DISADVANTAGES (continue):

6) TGC systems are generally technology-neutral; therefore they may pay windfall profits

to less-expensive technologies or more favorable sites;

7) the targets under TGC quota systems can serve as upper limits for development, there

are no incentives to install more than the mandated level;

8) the value of TGCs could be unstable when system is near the target level: if the target

is exceeded even slightly the value of TGCs could crash; if the target is missed, the cost

of TGCs could spike arbitrarily high (unless there is an “opt-out” fee for participants);

9) a long term and stable policy environment is essential for RES-E markets.

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Feed-in Tariffs (FITs)

FIT support scheme consist of:

● an obligation for the grid operator to buy all RES-E produced by plants connected to

its grid, and

● a feed-in tariff that ensures that RES-E producers receive a pre-set, above-market

price per KWh, guaranteed for a number of years

With equal tariffs producers are incentivized to exploit also less-profitable sites, since

their selling price will be able to cover their costs, even though other competitors will be

more cost-effective.

This will increase RES-E production and will imply:

Possible economies of scale for the RES-E production and higher incentives to

innovations (new operations or new technologies) , especially in order to reduce

production costs and achieve wider marginal profits.

Another instrument to incentivize production of RES-E, implemented in Italy, is Feed-in

Premium. The price of RES-E is made up of two parties: 1) the energy market value

and 2) a premium fixed by the public authority.

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TGCs vs. FITs

On a national level FIT systems have generally proved to be the most effective and

cost-efficient support scheme in the EU, delivering more RES-E than quota systems.

However we cannot say the same when we speak about an EU-wide level.

Difficulty:

in finding an appropriate EU (international) -wide level of feed-in tariff;

in adopting a single FIT framework that correctly reflects the geographic and

technological diversity of RES-E resources throughout the EU.

On the other hand, TGC systems

might benefit from the economies of scale and broader, more liquid markets that they

would find on an EU-wide level;

are also appealing for countries that would have difficulty meeting their targets at a

low cost using domestic resources.

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Both systems don’t exclude each other, they can be complementary and in several

European countries are used collaterally.

Feed-in Tariffs is much simpler in the operation: fixing the tariff rates for renewable

energy guarantees to its manufacturers predetermined profit.

A green certificate system does not differentiate individual renewable sources, and all

are treated equally, so give them equal support regardless of their nature, degree of

development, location and demand.

In contrast, a system of fixed prices, thanks to the diversity of tariff rates, provide

differentiated support to meet the manufacturing technology of renewable energy, fuel

used, the geographic size of the installation

TGCs vs. FITs

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Tradable emissions allowances (TEAs)

Tradable emissions systems are based on a cap-and-trade mechanism: the regulator

fixes a total emission limit (cap) and then distributes (or sells) a number of tradable

emissions allowances among polluters in the form of permits (TEAs).

Polluters that keep their emission levels below their allotted level can sell their surplus to

other firms.

As this system relies on a market, the regulator doesn’t need to know all the information

necessary to fix an emission standard; each firm knows its abatement costs and therefore

chooses the most cost-effective way to reduce emissions, reducing emissions itself or

deciding to buy TEAs from other more efficient companies.

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Analogy between TGCs and TEAs

Since participants can obtain their RES-E quota obligations from any source, market

actors would be expected to fund the least expensive projects in order to obtain any

amount of RES-E, minimizing costs for society as a whole.

This is the same mechanism on which is founded the tradable emissions system and that

allows the entire society to reach its objective in a cost-effective way.

Developing RES-E is a good way to reduce CO2 emissions, but this saving of emissions

usually isn't sufficient to cover its significant costs. Anyway, countries have decided to

support it since it brings also other relevant benefits, most importantly:

→ Better energy security

→ Increase in rural employment

→ A competitive advantage in the RES-E industry, especially for the future (it may result

very profitable to be the most cost-efficient RES-E producer!)

→ Mitigation of local pollution

In order to achieve these goals and contemporaneously obtain the desired reduction of

CO2 emissions, countries have often adopted dual policies, we will now see how they

may interact.

Benefits of RES-E

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Interaction between Carbon and

Renewable Energy Policies

Through energy policies the EU has tried to achieve 3 major targets:

→ Reduction of greenhouse gas emissions (especially CO2)

→ Deployment of renewable energy technologies

→ Minimization of the increase in costs for consumers

In order to properly achieve these goals, the EU should correctly coordinate the RES-E

production and the GHG reduction.

Interaction between Carbon and

Renewable Energy Policies

TEA are technologically neutral, they do not support a specific technology but rather

provide incentives for firms to use the most cost-efficient abatement technologies.

Conversely, RES-E directly support the implementation of renewable energy technologies,

with less emphasis on the costs of the project.

So, different solutions may be chosen, on the basis of the goals of the country:

If the sole policy objective is carbon dioxide emissions reductions, the coexistence of

TEA and renewable energy promotion schemes may result less efficient since renewable

energy generation is a more expensive option in the mitigation of greenhouse gas

emissions.

On the other hand if the carbon dioxide emissions reduction isn’t the only target, the

additional socioeconomic and environmental benefits which are generated by RES-E

deployment may provide a justification for the coexistence of both instruments.

Interaction between Carbon and

Renewable Energy Policies

Relations between RES-E and TEA

1) The implementation of a TEA system (also known as ETS) will be an incentive to increase RES-E deployment, since instead of reducing their production of electricity, producers now will only have to change the way they create this electricity

2) As more RES-E are deployed, the value of ETS will decrease, since RES-E will displace conventionally produced electricity, and Green certificates will become a substitute good of emission permits (as we know, stronger competition and larger supply lead to lower prices)

3) The effects on electricity price will be: An increase in price (P↑) as an «Emissions Trading Scheme» is applied (since the supply of electricity will decrease)

3a ↑ Pe

Electricity

market

ETS RES-E

deployment

2 ↓CO2 allowance price

3b Ambiguous effect on

final electricity price

↑ RES-E deployment

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An uncertain variation of the price when implementing RES-E, as on one hand electricity production costs will increase (P↑) , but on the other hand there will be a larger supply of energy and a fiercer competition leading to lower prices(P↓)

Effects of international trading of electricity, TGCs or TEAs on national environment goals

Different international integrations in the markets of electricity, TGC’s and TEA’s will

end up in different outcomes, we now examine the 3 most important cases:

1) International electricity trade= If there is only an international market for

electricity (and not for TGCs or TEAs), countries which give larger incentives to

green production (i.e. pay more subsidies) risk to incur into a free-riding problem,

since their producers could take advantage of these subsidies to sell their green

energy also to neighbouring countries at a more competitive price.

2) International electricity and TGC trade= We now add an international market

for TGCs to the situation in point 1. This could cause even more serious free-

riding effects, since neighbouring countries could produce green electricity and

sell it to producers in the more «environmentally ambitious» country through

TGCs. Doing this they would receive higher subsidies (i.e. increase their profits),

and have positive local effects deriving from lower pollution. This would also

cause negative pollution effects in the most environmentally careful countries,

since the RES-E production will be shifted to foreign countries.

Effects of international trading of electricity, TGCs or TEAs on national environment goals

3) International electricity, TGC and TEA trade= We obtain this by adding an

international TEA market to the situation in point 2. In this case, in order to

achieve a desired amount of RES-E in a country, this country simply has to

reduce its GHG emissions quota by a corresponding amount.

The price of TGCs will reflect the additional cost of developing RES-E, and TEAs

will represent the cost of a proportionate amount of CO2 emissions, so if the

markets work efficiently there should be no free riding problems. This is because

coordinating the national quotas of these two certificates the countries should be

able to incentivize an appropriate increase in RES-E development and avoid their

shifting into foreign countries, since now they won't “subsidize” new RES-E

projects, but they will simply decrease the TEA quota in the country, incentivizing

this way the production of renewable electricity, without giving any reason to

move the production abroad. It appears clear that this last system results the

most efficient and balanced of the three, but it also implies larger costs and a very

good coordination between the various states.

SUMMARY

White and Green Certificates are two instruments that aim at reducing CO2 emissions. Green Certificates (or Renewable Energy Certificates) system has been created to

confirm the origin of energy from renewable sources (as RES-E is indistinguishable from conventional electricity).

White Certificates: their aim is to promote energy efficiency and reduction of final energy consumption.

What is the analogy with emissions trading? Concerning the interaction of TGCs and TEAs we see that the reduction of carbon emissions only through renewables promotion is very complicated under the current growth of electricity demand. On the other hand, TEA system is quite costly for consumers. However, the combination of TGCs and TEAs helps to achieve the required carbon reductions at a lower cost and at the same time promoting renewable development. The main drawback of that policy is that with decreasing consumers costs there will be also a lower signal to reduce the energy consumption, what will have negative result in sustainability of the system.

SUMMARY

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REFERENCES

• http://www2.hawaii.edu/~mfripp/papers/Poputoaia_and_Fripp_2008_TGCs_and_FITs.pdf

• http://www.ewc.polimi.it/documents/EWC_brochure.pdf

• http://www.wikipedia.org/

• http://www.fotovoltaiconorditalia.it/mondo-fotovoltaico/modi-per-incentivare-rinnovabili

• http://tesi.cab.unipd.it/39416/1/Uso_dell'Asta_per_la_promozione_delle_energie_rinnovabil

i_nei_paesi_dell'Unione_Europea.pdf

• http://www.iit.upcomillas.es/pedrol/documents/gulli08.pdf

• http://www.janabrell.de/papers/abrell_weigt_interaction_emission_trading_renewable_supp

ort.pdf

• http://www.sustainability-ed.org.uk/pages/look6-3.htm