Why GO prices are crashing

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello listeners, and welcome to the Montal Weekly Podcast, bringing you energy matters in an informal setting. In today's episode, we'll turn our attention to Europe's environmental markets, guarantees of origin, to be precise. Prices have traded around 15 month lows on strong supply and weak auctions. What is happening and where are prices heading? Helping me, Richard Sverdson, to discuss the key issues in the guarantees of origin market is Daniel Arneson of VEIT. A warm welcome to you, Daniel. Thank you very much. Um, so I alluded to the prices for guarantees of origin. I think we could say the, um, the calendar 2023 product is now trading under one euro around one euro. What? What's going on? I mean, prices have been so much higher and maybe even, you know, more than half since the start of the year. What's happening, Daniel? Well,

Daniel Arnesson, Manager, Renewable Power Analysis: 1:01

essentially, what has happened is that um, Around, well, compared to 2022, what we have seen is a significant oversupply and that is the market is starting to realize it and they started to realize it around mid year last year that we saw an oversupply, like if looking at hydro, for instance, it was consistently lying a bit above 2022 and then in We're August, we saw rainfall and higher production as well. And in the price curves, you actually see the prices going down from then on. Um, so it's quite clear that it is weather related this. Uh, and also we saw, uh, huge, uh, or Higher than normal capacity build up on the renewable side in the AIB

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 1:55

region. So it's more to do with the abundant hydropower supply that's then pressing prices down? Yeah, we also

Daniel Arnesson, Manager, Renewable Power Analysis: 2:03

saw beneficial wind conditions for production as well. So we've seen higher there as well.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:11

And what, what's, I mean, we see quite a big difference between the, the, the calendar 23 products and the calendar 24 product, but what's, what's the difference? What's the reason for the price difference there? Yeah. Yeah. So,

Daniel Arnesson, Manager, Renewable Power Analysis: 2:22

so one of the reasons is essentially, um, if you buy an, a car that lasts for 20 years, it's worth more than if it only lasts for 10 years. Right. Uh, but also like, if you look at how the certificates are used, like not all countries allow you for swapping. uh, vintages, uh, when you are disclosing your, uh, energy mix. So that makes 2023 not useful in certain, uh, certain jurisdictions. Which, which ones

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 2:56

in

Daniel Arnesson, Manager, Renewable Power Analysis: 2:56

particular would that be the case? Well, Spain, I know I don't have. On the top of my head, uh, a good overview of it, but like in Scandinavia, you allow for, uh, swapping, uh, Italy has introduced it as well now, um, Spain, not, they don't do it in Germany either, uh, to my knowledge, uh, this is also something that we're looking into more now because we have really realized that it's important. It is affecting the market. And we also need to take in, take these things into consideration when we are modeling prices and the fundamentals of the market.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 3:32

I mean, for some, it may seem a bit odd as well that you're trading calendar 23, when that's that we're already in 2024. Yeah. Yeah. What's the reason for that? That that's being that's being traded. Well, that's,

Daniel Arnesson, Manager, Renewable Power Analysis: 3:43

that's also coming to do with the disclosure deadlines that's in March. Right. So, so, uh, well, generally you don't know how your, the consumption profile by the end of the, on the 31st of December. Right. So you need to have some time there, but yeah. So, so that's why it's, uh, still, still traded. And in Germany, it's even later.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 4:09

Okay, so do you think then this, that sort of the approach of the compliance period you're saying now, uh, end of March, do you think that will lend, uh, some support to prices? Well,

Daniel Arnesson, Manager, Renewable Power Analysis: 4:21

that's where we see the transactions in the ARB statistics. That doesn't mean that the trades have been completed by then, right? So uh, it, it could lend some support, but it's not certain. It depends on how market participants have positioned themselves ahead of this disclosure

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 4:41

period. Absolutely. So, I mean, the AIB is the Association of Issuing Bodies, isn't it, for those? Yeah, sorry. I mean, when you're in the

Daniel Arnesson, Manager, Renewable Power Analysis: 4:49

field, you're talking

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 4:50

acronyms. Absolutely. There is, there's quite a lot of acronyms in this market in particular, isn't there, Daniel? I think, yeah, absolutely. But, um, I think some of, um, you know, some of my colleagues who look into this market in particular talk a lot about the auctions. What's your view of guarantees of origin auctions? Do they kind of distort the market prices?

Daniel Arnesson, Manager, Renewable Power Analysis: 5:10

Well, I actually think that auctions are good. Uh, so I'm one of those who are for full production disclosure. Uh, and this is a step in that direction, like issuing geos for also supported, um, renewable power generation. Uh, and it also like it's beneficial for liquidity, but one of the issues that we have seen is that liquidity. Uh, demand is also an important for liquidity and that's where it hasn't kept pace in 2023. Uh, and that's what we see now. I can't remember when, but like mid last year as well, like it started to, uh, they, they were oversubscribed, uh, or undersubscribed. So they, the auctions didn't sell all of their. their geos. Uh, and that's kind of been a domino effect since then. And we're still seeing that now in auction coming up in March. And

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:11

this is in particular in, uh, say for example, in Italy and France,

Daniel Arnesson, Manager, Renewable Power Analysis: 6:14

right? Yeah. So in Italy, that's, uh, a colleague of mine recently wrote an update on it, uh, and, and how they've been setting the prices. too high, like they set it five days before the auction. And if you have a consistently decreasing price, commonly it can end up too high then, right? If it's the reversed, it's not a problem. But when prices are going down, it becomes a problem if they set too high floor prices

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 6:45

for the auctions. And who's doing the setting of these prices?

Daniel Arnesson, Manager, Renewable Power Analysis: 6:49

As I understand it, it is the, uh, GSE there, uh, In Italy, yeah? Yeah, in Italy. Which is the regulator, or? Yeah, I think that's the regulator. I'm not the specialist in the Italian markets in our team. Mm, mm.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 7:03

Yeah. But that, so, but then when, when you have these, these, uh, Italian guarantees of warrant, The origin auctions that they're heavily undersubscribed and maybe, you know, some even hardly any participants at all. Does that exert additional pressure on guarantees of origin prices in the market generally?

Daniel Arnesson, Manager, Renewable Power Analysis: 7:22

Yeah, it does. And, uh, and I know, um, by talking through with the market participants that they are actually keeping an eye on the auctions, right? So auctions are becoming very central when it comes to price setting also for the OTC market. Uh, and, and it can also, I imagine, affect, um, when deals are happening. So if you are close to an auction and you believe price is going to go down, you rather wait with clearing a transaction or agreeing to prices if you believe that the prices might be a bit too high. And, and 2023 has been like that.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 8:05

Because now what the next auction, I mean, we'll in Italy, certainly the, the, you could have all these unsold geos coming to the auction on the, on the 20th of March, right? Yes. Yeah. So that could exert a lot of downward pressure. Yeah,

Daniel Arnesson, Manager, Renewable Power Analysis: 8:16

it can, it can. And, and, uh, if Looking at Italian buyers, what I've heard at least, they are very, they are, if they can pay a cheaper price, they do that.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 8:31

That's what I, very price sensitive. Of course, but that makes sense. I mean, that's what market's there for, isn't it? Yeah, yeah, yeah. I mean, but if, do you see demand? for geos picking up at all? Um, or do you think that the development of new kind of new renewable plants, new renewable facilities, were they actually outpaced demand?

Daniel Arnesson, Manager, Renewable Power Analysis: 8:51

Yeah, so we have. So one thing with the geo market is that historically it has been very supply focused. Auctions are supply focused as well. And, and all Renewable capacity build out targets are also supply focused, right? And that's one, that has been one issue. What we have seen in the last few years is that the geomarket has been more affected by regulatory and legislative incentives on the demand side as well. So, for instance, we have seen the state aid scheme for indirect emission costs, where, um, Trade exposed and power intensive industry can source 30 percent geos and be eligible for, um, state aid to, to, uh, mitigate the additional costs that comes from buying electricity that is covered by the UETS. So these incentives have come and interestingly, they came before. The 2022 hike, right, in price, so, and we see more of these coming with the European sustainability reporting standard and so forth. So if these legislations are coupled by, you know, like financial incentives and so forth, I see that demand could pick up. Also, what has happened, what we've seen is that, uh, the, the. Macroeconomic situation that we've seen in Europe with, um, high inflation rate and lower productivity, uh, or production in industry has also resulted in lower electricity demand and that translates into geos as well. So when you're looking at, uh, for 2024, where there's a little bit more positive outlook on the economic side. Their demand could pick up a bit. But I do believe that, uh, decision makers or policymakers, they need to focus also on the demand side. Like if you focus solely on supply side with CFDs and so forth, you run the risk of outcrowding or outcompeting already existing generation. And that can be dangerous. We've seen that in the, in, in the LSAT system in Sweden, Norway, where prices plumbed and, and, uh, and generators that were early in it, suffered greatly because, because

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 11:32

of this. Absolutely. So what, what kind of measures would you like policy makers to, to, to undertake to do? What, what, what would you like to see them put it, put in practice? Yeah.

Daniel Arnesson, Manager, Renewable Power Analysis: 11:43

So this is, this is a bit tricky because, uh, ever since the, the, the legislative framework of the geo market and, you know, like the targets in the EU were, It's kind of a political compromise. So the commission wanted to have it as a support system, the geos, where you had like portfolio standards on, uh, companies and suppliers so that they were obliged to buy this, but that couldn't happen in the end because Germany were proposing feeding tariffs and so forth. But I actually see that in the legislation as it is now. Can be changes with sector coupling, uh, and also introduction of indicative targets for industries and so forth that are not really directly where, where GEOs actually can play a role. And, and the commission has actually said, like, you need to cancel GEOs, uh, in order to, um, claim that you produce renewable hydrogen classified as renewable fuel of non or. uh, organic origin right under, under the, uh, those targets. And I would like to see. Uh, that some of the indicative targets for industries, but also for in buildings, for instance, are incentivized. If they can't be mandated, at least incentivized with tax, uh, rebates and so forth. Because I think that there needs to be a balanced approach in terms of supply and policy also from a policy, uh, or decision making.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 13:23

Absolutely. And then, I mean, I'm just also wondering what you think, would prices return to 2022 levels?

Daniel Arnesson, Manager, Renewable Power Analysis: 13:31

So depends, as I said, like that depends on corporate uptake of, so it's also voluntary targets here. Um, but I would say that regulatory. incentives matters. And I would not underestimate the impact that the, for instance, the state aid, uh, schemes in Europe have had on the geomarket. So I think that's very, very important.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 14:01

I think, you know, if I return to the supply side as well, um, Daniel, and talk about, you know, one sort of fairly controversial virtual aspect is the nuclear geos, especially coming from France. I mean, do you, do you see those coming in and flooding the market and exerting also downward pressure that we've talked about earlier?

Daniel Arnesson, Manager, Renewable Power Analysis: 14:22

Yeah. So, so that depends again. So it depends on certainly there are a lot of market participants that are more interested in, geos, right? And for those. Um, those, uh, stakeholders, nuclear geos is obviously a welcome feature, but we also see already that nuclear are oversupplied. They are not consumed to the same extent as renewables. So renewables are more highly valued, indicating that many in the market are actually interested in the renewable attributes as well. And this you can also again see in some policies. And some countries refer to when, uh, when there are incentives, carbon free electricity. not surprisingly, France is one of those. Uh, and others are referring to renewable, uh, like more renewable driven or focused

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 15:26

incentives. Cause these labels are quite important, aren't they? I mean, you know, you could be accused of greenwashing or, you know, but carbon free to green electricity, they're, they're two different things. Carbon

Daniel Arnesson, Manager, Renewable Power Analysis: 15:39

free and, and, and,

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 15:41

and green.

Daniel Arnesson, Manager, Renewable Power Analysis: 15:41

Yeah, yeah, yeah. Of course. Of course. So like the thing with nuclear is like, of course it's carbon free, at least from a generation only perspective, uh, but there are other downside to it. Like, how do you store this? It's certainly not renewable and so forth. Meanwhile, you have that in, in renewable technologies, but also with renewable technologies, you have Issues. And you can see that in the, in the kind of preference for specific technologies under the geo system, like some are not interested and don't want to meddle with biomass, for instance.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 16:19

But I think, yeah, I mean, this is, this is, of course, um, you know, it's, it's a, it's a fascinating debate because some countries, some companies will want to, to buy nuclear, nuclear geos. And that's, that's absolutely their right to do so, whereas others will want to focus on, uh, another. Um, guarantees of origin, which reflects more, maybe more wind or, or solar, but that's, that's just the nature of the market. And that's where the prices are so different as well. Right? Yes.

Daniel Arnesson, Manager, Renewable Power Analysis: 16:46

Yes. It's a, it's a supply and demand.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 16:50

Absolutely. It's a standard market. Yeah. There has been some controversy in the Guarantees of Origin market, and you mentioned the AIB, the Association of Issuing Bodies, they, you know, last year, they suspended Iceland from trading Guarantees of Origin. There's also some question marks around potentially if the same could happen to Norway. Do you think this issue of double counting Is it's now been eradicated or could it kind of, could it creep up again? And is it sort of looming? Is there's a shadow looming over the guarantees of origin mark around this issue? Yeah. So

Daniel Arnesson, Manager, Renewable Power Analysis: 17:25

I actually think it's good that the AIB is engaging with these issues. Uh, it can also drive the discussion or the debate on an EU level. Right. bearing in mind that the AIB is not an EU institution, right? Um, but I don't see this issue as solved. Uh, and I can't say that the result of the Icelandic case did provide much clarity either. Uh, you had the AIB stating that they will continue looking into double, uh, counting and claiming. Uh, meanwhile, the Icelandic authorities stating that the, um, the ECS rules, like the rules under the AIB is not, not addressing double claiming. Uh, so they said that they are acting within, within their Kind of within the rules, so to play. So, uh, it's, I would say it's not clear there. Uh, also one of the things here that we have to remember is that these cases are not just something that AIB engage in. So like, oh, let's look into Norway now. There needs to be a member of the AIB that is a issuing body, a national or regional issuing body in the EU EEA. Uh, or the energy community that for instance, for that matter, um, or a market participant that raise a non compliance complaint, and then it can be triggered. So, uh, and, and looking at Norway, for instance, um, and, and coming back to the state aid here, they are using a location based method where they essentially say that, uh, beneficiaries of state aid can get. state aid for free because, well, they are in Norway and it's, it's majority renewable. Meanwhile, in Germany and in other countries in Europe, they use a market based approach. So there is a double counting issue between these policies there. The problem is that it's not sufficiently harmonized in Europe. How

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 19:44

do you go about harmonizing that? I mean, I'm sure this is quite crucial. Otherwise, this issue is going to keep coming back, keep haunting, you know, this, you know, location versus market, you know? Yeah.

Daniel Arnesson, Manager, Renewable Power Analysis: 19:53

So I would say like in Europe, it is more harmonized than, um, when looking into Norway and Iceland. because they are not members of the EU. So in Norway, you don't have, you have not adopted the Renewable Energy Directive. You have the first Renewable Energy Directive. So it, and it's not, in its language, it's not, it doesn't require as much when you're selling a PPA, for instance, as a green. In, in the new Renewable Energy Directive, it's very clear that if it's PPA is green. Or claim to be renewable, it needs to be supported by geos, and that's not under the EA agreement yet, and it has taken them a long time to scrutinize that, but there's also other levels to harmonizing the geo system that, um, that Could be seen as an issue. And, and one of these things is the disclosure. Like, are you gonna have monthly, yearly? And uh, like what is it shifted? Should you be able to use 2023 for 2024, and so forth. Exactly.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 21:07

So what, what, we'll take on this. Should there be 24 7 counting? Should there be annual reporting? You know, um, you know, you've had several, several 24 7 programs out there. How, how successful have they been, for example.

Daniel Arnesson, Manager, Renewable Power Analysis: 21:20

So that's a little, that's not my expertise on their success. I can imagine if you ask them, they have been very successful.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 21:31

But when you stand on the 24 7 versus of annual reporting, I mean, where are we going? What's the direction? Where should the direction of travel be? Yeah,

Daniel Arnesson, Manager, Renewable Power Analysis: 21:39

so. Essentially, like, the benefit with 24 7 is that you will, the renewable energy production will be more, uh, it will be built for, it will be placed where it is needed, for instance, and it will be built to produce when it is needed to be produced, so to speak. And that's why the commission is linking it to the production of renewable hydrogen, for instance. Um, there are obvious benefits with that. Uh, some of the downside is that it would limit the, uh, engagement of different market participants. I would say that there are, there would be fewer actors in the market and that can be a problem. I would,

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 22:26

So that's the problem for liquidity then you're saying? Yeah, I

Daniel Arnesson, Manager, Renewable Power Analysis: 22:28

would, I would, I would say that. Uh, uh, but then one of the main problems here, and that comes with what I, talked about earlier, that's the demand. So like, is there a demand for 24 7? Sure, then it's good, right? But demand side measures are a general problem with the geomarket. And I think, yeah, like that's like voluntary. we see it's picking up, right? But we need, we need to engage more in policy.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 23:00

You have more of an impetus there to sort of harmonize as well on the demand side, right?

Daniel Arnesson, Manager, Renewable Power Analysis: 23:04

Yeah, like, um, to, to have for, for the state aid for be very efficient, Norway should go for market based as well. That would certainly drive the energy transition more. Then, uh, otherwise, and then it, then, so, so this discussion between 24 seven or annual that's comes later in a way, I would say, like you, you need to deal with the demand, but one thing that the 24 seven do address. is critics that say, well, that's just greenwashing. So like, and that's some of the beauty. It's kind of like a, a, a challenge for the geo market, but it's also one of the beauties is that it's quite flexible. It can speak to specific stakeholders. Like if you have a demand for 24 seven, now we're granular certificates. It's possible, uh, but I would say like the majority of the market is not demanding that right now. I

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 24:09

mean, I just finally want to touch on, um, uh, the U. K. here as well. The U. K. has its own sort of counties of origin. Rego is a renewable energy counties of origin. Um, How much upside is there here? Because, you know, the, the UK no longer recognizes, um, geos from the European Union. So what's, what's, what's happening here? What, what, what are the dynamics going on here? Yeah,

Daniel Arnesson, Manager, Renewable Power Analysis: 24:34

so certainly we saw a, um, a squeezing supply and that did affect prices, um, um, we saw prices going up to 25 pounds, I think per megawatt hour. And I think, but at those levels, the demand was quite scarce, uh, which I would say indicate that. At least we see a limit there right now. Uh, but essentially it's like with the geomarket as well. Like the level we can reach is dependent on the willingness to pay for the offtakers and the willingness to pay for offtakers are dictated by what money they have to maneuver with. So like there is a limit and it looked like it was like 25 pounds there I would say in the UK. Um, and, and going forward, like if I'm not mistaking, uh, forward prices are traded below, which indicates that market participants believe that the capacity build out will have a, um, a positive impact on prices. Um, for the view of the consumers, so to speak, so it will see lower prices, but we'll, we'll see how it, how it develops. And as with the geo market, it's highly dependent on weather as well, regardless of how you're building out the capacity we are looking at. So we, in our longterm model, for instance, now I'm jumping from regos to geos, but there we saw we have. Um, looked at supply differences between using 2020 and 2022, uh, weather years. And we see a difference in a hundred, in almost a hundred terawatt hour. So you, so, so weather does have a huge

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 26:31

impact. Absolutely. And certain, certainly in, in, in this part of the world, but you know, the, The guarantees of origin markets often come under criticism for being not mature enough or, or, or not transparent, you know, it's certainly in the same level of price transparency that exists elsewhere. What's your view here, um, Daniel? Yeah,

Daniel Arnesson, Manager, Renewable Power Analysis: 26:52

so certainly the geomarket is, it's, it's a maturing market. It's constantly evolving, right? Uh, prices, uh, The one thing that auction has contributed with is greater insight into prices. Um, but there is, so it's not only with respect to prices that the geo market is lacking transparency. It's also with respect to the fundamentals, like, uh, you have several issuance bodies that you can go to and get updated on supply cancellation with lag, though. And then, so that's a lag there. And then if you look at the AIB statistics, which is compiling the data in a way, there is even greater lag. So, it's very difficult to get real time fundamentals data on Geos. And, and it's not. Made easier by it's by the complexity of the GM market being that some countries don't allow issuance for supported geos like Germany and others do. Uh, so you need to take these complexities in consideration and the combination of, uh, the opacity and the, and the complexity, it's not really good. for market participants. It's good for bait as an analytical company providing insight, but not if you're engaging in the market, then you need to have this expertise.

Snjólfur Richard Sverrisson, Editor-in-Chief, Montel: 28:28

Because it's quite a patchwork, isn't it? Yes, it is. It is. Daniel, thank you very much for being a guest on the Montel Weekly Podcast.

Daniel Arnesson, Manager, Renewable Power Analysis: 28:35

Thank you very much.