Bodecker Partners recently interviewed our Norwegian Analyst, Trine Braathen, at our base in Norway, for a special feature on renewable energy and the demand for companies wanting to reduce their carbon footprint.
How has the price trend of Guarantees of Origin been over the last year?
Over the year we have witnessed major fluctuations in the price trend, with prices increasing drastically throughout the seasons. To begin with, the Guarantees of Origin were priced at around 0.3 Euro per MWh, but due to a very dry Nordic region, these prices shot up to almost 1 Euro per MWh as we approached the summer months. The fluctuations continued throughout July, and we saw the prices shoot up to almost 2 Euros per MWh. We suspect that clarification from the EU that Guarantees of Origin should in fact be used to prove the origin of renewables for electricity, was largely responsible for these increased prices.
When there are large fluctuations like this in the market, it is important for us to look at our liquidity. It was clear that liquidity fell significantly when we reached the higher prices. When prices were between 1.60 Euro and 1.70 Euro, we were still experiencing a lot of activity, but then it dropped drastically as the prices continued to rise. Manufacturers did not want to sell in such a rising market. As the prices fell, the sellers returned but the buyers pulled back to assess the market. At one point, we had to drop our prices to almost 1.30 Euro per MWh! Luckily, we are now back up to 1.60 Euros as we head into 2019.
How much is the difference between different types of Guarantees of Origin?
The price is influenced by a number of factors including location and the type of production. In 2019, we estimate that wind will trade at around 1.90 Euro, which is 30 cents higher than water. Of course, this will be influenced by where it is produced. Guarantees of Origin from wind produced in the Netherlands is worth about 7.95 euro per MWh because so many consumers want locally produced electricity. Other influences are the different types of certifications, e.g. is it a “Good Environmental Choice” (“Bra Miljöval” in Swedish) or is it a new production.
What can you say about demand?
Over the past ten years, demand has increased steadily in Europe. Germany has been, and continues to be, a very big player. We have growing interest from companies that want to be sustainable, and we have an EU regulatory framework that supports and drives this. Large organisations are driving the trend which is great news, as well as several countries, for example, Spain Germany, Italy and Switzerland. It will be interesting to see where it ends; it is, after all, a voluntary system. What will the price limit be?
The willingness to pay is different in different countries. In Norway, we think it is expensive because of the value of the Euro, but the Netherlands will gladly pay between 4 and 8 Euro per MWh. Of course, it seems more expensive to us as we are used to prices being as low as 10 cents! If prices stabilise at the higher cost, people’s views on what is reasonable will change.
What is happening in Norway and Europe now?
We have watched this in Norway since it started in 2001. The reason is that hydropower in Norway accounts for about 98% of electricity generation. This combination of flexible energy production is in response to market demand. However, currently when warranties are sold at the same time, it results in double counting. There is currently an ongoing process that is considering changes to the system of Guarantees of Origin and the residual mix for power to address this issue. Depending on the outcome, this may have a significant impact on Norwegian demand and for the system. As far as the EU is concerned, it has also been a rather long process and when the legal text of the directive is completed, it may also have a positive impact on prices.
Looking ahead, what does the supply side look like?
We predict that the supply will continue to increase. There is a rumour that France can generate over 45 TWh of new production using Guarantees of Origin next year. If that is the case, there is a large supply increase right there. The question is however, whether the volume can actually pick up so quickly. It’s possible that increased supply will also come from Germany, thanks to Guarantees of Origin. We predict there is a potential of over 25 TWh between 2021-2025.
We also predict that there will be at least 22 TWh of wind power energy produced in Sweden and Norway by 2021. Overall, we expect to see an increased production of up to 87 TWh across the different sources, most of which will occur before 2021. The question is however, how much of that will be demanded and at what price?
So, what do you think about the prices?
As long as the demand is higher than the supply, prices should pick up slowly but surely. One thing that increases the value is that more and more companies are purchasing Guarantees for communications and marketing purposes, as well as to reduce their footprint in climate reporting. This is a new occurrence and hasn’t been evident before. More customers demand more local production so local Guarantees of Origin will be more valuable.
The opinions and predictions expressed in this article should not be relied upon in making investment or procurement decisions of any kind. The views contained herein should not be considered market timing advice or used to value risk in any way.