White, green and black certificates: three interacting sustainable energy instruments

White, green and black certificates: three interacting sustainable energy instruments October 2005 by Eric Bonneville, Dr Anne Rialhe, AERE email e.bonneville@aere.fr Contents 1 Definitions 2 1.1 White Certificates................................ 2 1.2 Green Certificates................................ 3 1.3 Black Certificates................................ 4 2 Legal Aspects and Obligations 4 2.1 White Certificates................................ 4 2.2 Green Certificates................................ 5 2.3 EU ETS Black Certificates.......................... 6 3 Success stories and lessons learned 7 4 Conditions required for Success 10 5 Impact on the market 10 6 Interactions 11 7 Conclusion 12 October 2005 Page 1 of 14

This paper presents three different types of certificates ( white for energy savings, green for renewable electricity, and black for greenhouse gas reductions in the European Emission Trading Scheme). The current limited experiences with these instruments already allow to define some of the success factors for these new instruments. A synthesis of their current application presents how much energy is saved today due to these certificates, and how much green electricity is produced. A discussion on the methods for setting the targets, measuring the impacts on the market and the interaction between these different instruments concludes this paper, followed by a reminder of the proposal to create an international agency on global stewardship for climate change issues. 1 Definitions Following the Bonn political agreement and the Marrakech Accords (respectively July and November 2001), Japan, the European Union and many other European, Latin American, African and Asian countries have ratified the Kyoto Protocol (adopted in 1997), which entered into force the 16th February 2005 as Russia joined in. A quick implementation of emission reduction measures is now required to ensure compliance with the first commitment period of the Protocol (2008-2012). In order to meet the EU target of 8% reduction of greenhouse gases emissions (compared to the 1990 level), three market based instruments are proposed by the Kyoto protocol (creating 3 different commodity markets for carbon): International Emission Trading, with Assigned Amount Unit (AAU), Joint Implementation, with Emission Reduction Unit (ERU), The Clean Development Mechanism, with Certified Emission Reductions (CER). International Emission Trading is proposed in the Kyoto Protocol as a cost effective emission reduction instrument. Joint Implementation and the Clean Development Mechanism are project-based mechanisms that allow a country to take claim credits for the reduction of greenhouse gas emissions obtained with projects developed in other countries. 1.1 White Certificates White Certificates (WhC), or Energy Efficiency Titles (EET), are a new system to promote and increase energy efficiency, through an energy efficiency trading scheme. White Certificates aim to reduce energy consumption and greenhouse gas (GHG) emissions. They are currently implemented in the UK, in Italy and in New South Wales (Australia). October 2005 Page 2 of 14

State government Power / Gas Suppliers bought WhC Market set develop Granted with White Certificates tradable Mandatory targets of Energy savings Energy Efficiency Projects Figure 1: White Certificate mechanism This scheme is based on mandatory energy saving targets that certain market actors (power and/or gas suppliers) have to meet. Mandatory targets are set by the government after negotiation with actors concerned. These must promote energy efficiency projects to their customers. Certificates are issued for the resulting energy savings, which can be traded during a certain period. Actors who haven t met their target, could buy White Certificates on the market. This mechanism is also supported in the proposed Directive on End-Use Energy Efficiency (2003). 1.2 Green Certificates State government Electricity Producers & Distributers bought set Produce Green electricity Mandatory or not mandatory targets Green Certificates Green Certificates are another marketbased instrument that is used for the development of the renewable energy market. The producers of green electricity receive Green Certificates for each unit produced, which they can trade on a Tradable Green Certificate (TGC) market. The TGC system is combined with mandatory targets on the share of renewable energy production, supply or consumption. Tradable Different types of schemes have been set TGC up or discussed in Western European countries: in Austria, the TGC is based on Market an existing certificate systems and coupled Figure 2: Green Certificate mechanism with an obligation for disclosure and a feedin tariff for renewable energy sources; in Belgium, the system is coupled to renewable obligation for suppliers; in Italy, the system which started in 2002 is coupled to obligation for suppliers and importers and feed-in tariff system; in the Netherlands, the system which started in 2001 is based on a voluntary program and coupled with financial incentive for final consumers; in Norway, the system is under discussion and should be linked to the Swedish system; in Sweden, the system which started in 2003 has a general target of 10 TWh by the year 2010 and is coupled to obligations on final consumers; in October 2005 Page 3 of 14

United Kingdom, obligated parties are distributors which are expected to reach 10.4% of green electricity produced by the year 2011; in France, green certificates are issued and withdrawn, on a voluntary basis for producers and distributors. 1.3 Black Certificates EU ETS State government 12,000 installations bought Allowances Market set set Granted with Black Certificates -8% of CO2eq emissions Mandatory individual Targets for CO2 reduction projects The last market-based instrument presented in this paper is the black certificate, or emission allowance. An emission allowance is a permit to emit one ton of CO 2 equivalent during a specific period. The European Union Emission Trading Scheme (EU ETS) relies on the allocation of allowances and the trade of certificates. 12 000 installations are covered by the EU ETS, representing a total amount of 1 680 million ton of CO 2 (46% of the CO 2 emissions of the EU-25). The power producers participating in the Figure 3: Emissions Trading Scheme CO 2 allowances market can trade allowances in order to cover their CO 2 commitment, equalizing their Marginal Abatement Cost (MAC), which is the real price to reduce one extra ton of CO 2. The final European Directive on EU ETS, which was first proposed in 2001 under a draft Directive, has been approved in 2003 and aims to achieve the overall target of 8% from the 1990 level emissions reduction during the first commitment period of the Kyoto Protocol (2008-2012). A degree of flexibility has been introduced by the final Directive for integration with other market mechanisms: the exchange of GHG allowances with other national/regional GHG trading scheme is allowed. 2 Legal Aspects and Obligations 2.1 White Certificates White Certificate schemes operating in Italy and in the UK use different mechanisms of trading. In the United Kingdom, the mandatory targets are set by the Office of Gas and Electricity (OFGEM). Obligated parties are electricity and gas suppliers with more than 15 000 customers. The energy reduction target is set to 62 TWh for the period of 2002-2005, October 2005 Page 4 of 14

which represents an annual reduction of 1% in CO 2 emissions from households. The electricity and gas suppliers can trade their white certificates, but also their obligations, as mentioned by the Energy Efficiency Commitment (EEC). Installations under the EU ETS won t have to meet the WhC targets. Despite a balanced consumption of final energy between households, industry and transports, the White Certificates apply only for the households sector. We can note that a target of 1% CO 2 emissions reduction is not a difficult challenge, and that a business as usual scenario, based on current improvement, due to technical improvement and replacement of obsolete equipment, would have produced at least the same reduction. In Italy, the obligated parties are electricity and gas suppliers, with respective targets of 1.5 Mtoe and 1.3 Mtoe of energy saved through energy efficiency projects by the year 2006. This represents 32.6 TWh on the running period of 2002-2006. That is to say 2% per year, based on the 2001 electricity consumption. This amount contributes up to 14% of the total CO 2 reductions of the Kyoto target. Obligated parties receive a White Certificate for every MWh avoided, which can be mutually traded between the suppliers or external parties, such as Energy Service Companies (ESCOs). Every certificate lasts for five years, except those obtained thanks to building insulation and other projects in bioclimatic architecture, which last eight years. One certificate is equal to one saved toe/year of primary energy. In the electric field, one saved kwh is equal to 0.22 10 3 toe of primary energy. This value depends on the efficiency of the Italian electric system production and will be regularly updated to take into account changes. There is no restriction concerning the sector of customers of obligated parties where energy efficiency projects will be developed. A list of energy efficiency measures is proposed and is open to other specific measures. 2.2 Green Certificates In 2001, the European countries have set an objective of consuming 22.1% of electricity produced with renewable energy sources. Since October 2003, each Member State has to prove the origin of renewable electricity produced/consumed. Some European Member States have begun to collaborate in order to build an international voluntary TGC system: the Renewable Electricity Certificate System (RECS). This system is composed of 13 European Union countries such as Finland, Italy, Austria, France, Portugal, Germany, Belgium, Luxemburg, Netherlands, Spain, Ireland, UK, Sweden. This system might lead to a future European Union Tradable Green Certificates, similar to the EU ETS. Since June 2001, 22.5 millions of one MWh certificates have been issued. October 2005 Page 5 of 14

2.3 EU ETS Black Certificates Each Member State or accession country has to implement the Emission Trading Scheme in its own legislation. The implementation is planned in two phases: from 2005-2008 (initial phase of the scheme), each Member State (including the accession countries of the first round) has to set the total quantity of allowances for that period, and the allocation of those allowances to the operator of each installation under the EU ETS. The second phase will start January the 1st of 2008, for 5 years. Once again, each Member State will have to decide the total quantity of allowances and its repartition among the operators of installations covered by the scheme. The total amount of allowances will be directly linked to the Kyoto target of each Member State. The parties which can trade emission certificates are countries that have ratified the Kyoto Protocol, entities that are trading on behalf of these countries (as long as the emissions traded do not exceed the Assigned Amount Units of the country itself), companies or installations as defined by the EU Directive. Emission reduction credits received thanks to Joint Implementation and Clean Development Mechanism projects can be converted as allowances in the EU ETS up to a limit of 8% of the total allowances. October 2005 Page 6 of 14

Definition Energy savings certificates Electricity produced with CO2 emissions certificates renewable energy sources EU Objective Market Commodity traded Participants (mandatory / voluntary) Time frame White certificates (WhC) or Energy Efficiency Titles (EET) 1% of energy savings per year and 1.5% energy savings for the public sector White Certificates Market Power Market White Certificate = one unit of energy saved. In the UK, obligations can also be traded (on a 3 years running period) Electricity and gas suppliers (residential and commercial sectors) 2002-2005 in the UK, with an expanded scheme from 2005-2008 2004-2008 in Italy Until 2010 in the EU Green certificates Tradable Green Certificate (TGC) scheme Increase of renewable energy source supply to 22% in the EU by 2010 TGC and RECS market Power market Green certificate = a unit of renewable energy produced. Untill now, no harmonized unit exist. In the RECS system, one Green Certificate represents 1 MWh of renewable energy produced. Electricity production: Renewable Energy producers and importers Distribution companies Consumers Initial phase 2001-2002 Aligned with EU Target by the year 2010 Black certificates European Union Emissions Trading Scheme (EU ETS) Reduction of greenhouse gases emissions by 8% compared to the 1990 s rate EU allowance market JI/CDM market Power market EU allowance = 1 ton of CO2 equivalent Energy intensive industry Two phases. 2005-2007: 5% of allowances can be auctioned. 2008-2012: auctioned allowances can reach up to 15% of the total allowances. Figure 4: White, green and black certificates overview 3 Success stories and lessons learned In Italy, the targets are for 17.4 TWh of electricity saved over the period 2002-2006, and for 15.1 TWh of gas saved. Because of difficulties to implement the system in the Italian system (estimating energy savings, verifying energy savings), the WhC system has still not been started but should be ready by the end of 2005. In the UK, in the middle of the running period (2002-2005), half of the global target (30 TWh) was met thanks to efficiency measures such as houses insulation, dissemination of compact fluorescent light bulbs, high efficiency boilers and high efficiency electrical appliances. But, during the same period, no White Certificate was traded: the first trades will probably appear within the last year of the running period. A second phase of the program is scheduled for 2005-2008. Concerning the RECS market, 80 members are actively trading certificates: since June 2001, 22.5 million certificates have been issued. In France, only 594 579 green certificates October 2005 Page 7 of 14

were issued and 342 011 withdrawn from the market for the last report of Observ ER, the French issuing body agency. These are cumulative results since December 2002. Besides the numerous political and financial barriers raised against the development of renewable energy in France, another financial barrier is created by ObservER which leads to a closed market for small producers: e500 is required to open an account and between e500 and 2000 per year (before taxes) are necessary to carry out audits to certify the green nature of the electricity produced. The registration of a renewable energy plant costs e250 before taxes, and last but not least, issue, transfer and withdrawal trades are respectively taxed with e0.08, 0.04 and 0.04/certificate. As shown on the figures below, the European wind power energy capacity is expected to grow higher than the European White Paper target, but thermal and photovoltaic energy are far away from the target by the year 2010. The three technologies are not developed on the same basis: some are benefiting of feed-in tariffs, and some of these tariffs can be attractive (as PV and wind in Germany) or dissuasive (as PV and wind in France), some are developed only under market conditions, as the solar installations, which can benefit from subsidies for the installation but not for the production. European Windpower Energy Capacity 80000 70000 67600 60000 50000 MW 40000 40000 30000 20000 23298 28452 10000 0 10000 2002 2003 2010 Current trend White paper Figure 5: European Wind Power Capacity Forecast (Observ ER 2004 data) Indeed, the wind power industry benefits from favourable legislation and incentives such as feed-in tariffs, to develop on a large scale, primarily in three countries (Germany, Spain and Denmark) which lead the development of wind energy. October 2005 Page 8 of 14

European Solar Thermal Energy Capacity 120 100 100 millions of m2 80 60 40 20 0 15 12.8 14 36.9 2002 2003 2010 Current trend White paper Figure 6: European Solar Thermal Capacity Forecast (Observ ER 2004 data) Solar thermal energy is developed largely by market forces, except in some part of the European Union, like in Barcelona where, on each building, a percentage of sanitary water, determined by the law, must be heated with solar thermal collectors. In Barcelona this means a high number of installations. In parallel some of the installations encounter installations problems due to a lack of qualification of installers and plumbers - an issue currently being addressed by the industry. European Photovoltaic Energy Capacity 3500 3000 3000 2500 MWp 2000 1500 2000 1000 500 0 650 572.7 284.1 392.1 2001 2002 2003 2010 Current trend White paper Figure 7: European Photovoltaic Capacity Forecast (Observ ER 2004 data) October 2005 Page 9 of 14

Photovoltaic energy is both developing through market forces and through the support of feed-in tariffs. These tariffs differ widely in different countries, which results in real differences in the status of PV development. 4 Conditions required for Success We can indicate the following conditions, which seem to be required to develop a market. A necessary requirement is the standardization of the commodity traded for one type of certificate: concerning the Green Certificates for instance, except for the RECS system (which represents only 13 countries of the European Union), there is no harmonized value of a unit of renewable energy produced for the whole EU. The marginal decrease of energy savings cost should differ from one party to another, to create a real incentive for trade, which means an active market. The number of parties on a market should be large enough to build an active and perfect market. The target determined by the monitoring desk should be based on explicit criterion such as the energy consumption and set as an amount instead of a percentage. Trades should concern only one type of energy savings to avoid double counts and difficulties of defining conversion indices. Finally, the rules of certificates markets should be simple and clear. 5 Impact on the market The increase of the energy cost after the implementation of White Certificates and the EU ETS can be significant, according to many studies. Today, there has been no impact on the market price. The target set for each mechanism plays an important role on the different markets: for White Certificates, for example, energy savings are expected to be obtained at negative net costs up to a certain level (around 15% of cumulated energy savings by the year 2020 compared to the base case). With an increase of the certificates or allowances prices, development of energy efficiency projects, renewable energy sources and greenhouse gases reduction technologies are expected to be realized as they would increase the profitability of market actors. October 2005 Page 10 of 14

6 Interactions Considering that the reduction of greenhouse gas emissions is a common element to the different market-based mechanisms discussed here, there is an obvious interaction between the impacts of the three certificates. Other interactions between the different mechanisms can occur indirectly through the power market prices (see red dashed lines in Figure 7): actions of a fuel producer, for example, should influence the price for a renewable energy producer even if the certificates markets are separated; the power market links the different certificates together. White Certificates Distributor Supplier Allowances Power Producer with distribution Power Producer Consumer Green Certificates Renewable Energy producer Certificates Markets Power Market Figure 8: Interactions between the Market Mechanisms Indirect interactions can also occur through the common final energy consumption of entities which fall under different mechanisms. For example, Green Certificates can influence emissions reductions through the development of renewable energy sources in the households sector substituting fossil energy sources, which would create a reduction for gas suppliers which fall under the EU ETS. Finally, since the electricity supply companies are often also electricity producers, they can participate in both White Certificate and EU ETS schemes simultaneously, which creates direct links (see red line in Figure 7) between those two certificates markets. Nevertheless, the possibility of converting the commodities from one to another is excluded. As prices of certificates are linked to the target set for each mechanism, the price of allowances could go up while the price of Green Certificate could fall. October 2005 Page 11 of 14

All these examples require a clear report and distinction between the different monitoring entities: an over-evaluation of CO 2 reduction, as an example, could easily be reached through double counting. A clear distinction in target setting is necessary to prevent any confusion between the three different mechanisms. 7 Conclusion The Kyoto Protocol, which has only recently entered into force, proposes three mechanisms in order to meet the defined targets. These mechanisms are still neither clearly defined, nor applied with concrete actions, easily understandable for the public, the industrials actors, or even the Member States. Actors are adopting a careful wait-and-see policy, which results today in implementing only the most cost-effective actions in some countries. Beyond these three market mechanisms, the rules of the broader play of Kyoto are not specified yet: what are the monitoring procedures, and the sanction procedures, if the targets are not met? How will the countries engaged in the Kyoto Protocol be sanctioned for not meeting their targets, while other countries continue to consume and increase their greenhouse gas emissions without any constraint? As we can hardly imagine the European Union coming back on its climate policy, industry actors should implement the market mechanisms proposed, in order to implement energy efficiency measures and save energy at their own rhythm. If they do not so, then the European Union and the different States would have to interfere with more stringent regulation, especially for the electricity market. Actually, mandatory targets and regulation seem to be key success for the three market mechanisms as they do not assure a sufficient security of supply (as it occurred in California and Sweden), a sufficient quality of service and a positive environmental impact. These questions raise another concern on world governorship concerning the global warming. As it has been proposed in Johannesburg (2002), the creation of an international agency with a sanction role would probably be a good way to make up for lost time in implementing the Kyoto Protocol. The creation of the international agency will not, of course, solve the difficult question of the mechanisms, and of their nature, developed to push countries to respect their Kyoto commitments. But it will demonstrate how seriously this question is managed by some countries and introduce it in the international negotiations, as human rights are introduced now: it s certainly not perfect, it s certainly not always taken into account in economic negotiations but it constitutes a firm basis that some countries can used. The same mechanism can be imagined by the champions of the Kyoto Protocol. Given the strength of scientific evidence which suggests that the situation is even more urgent than anticipated, the European Union has to meet its Kyoto October 2005 Page 12 of 14

targets, in order to exert pressure on other countries such as USA, China or Australia to reduce their emissions as soon as possible. Finally, if the industrial and households sectors are well handled by the mechanisms, the commercial sector is only indirectly handled thanks to the White Certificates and the transport sector is surprisingly not affected at all by mandatory targets and market-based instruments: given the experience of the development of the latter certificates, it becomes urgent to develop similar actions for those two sectors, especially for the transport sector. Authors BONNEVILLE Eric, Electrical Engineer from the Ecole supérieure d électricité Supélec, specialized in energy systems, now working on energy efficiency and demand side management at the French company AERE, 18 rue G. Guynemer F-73100 Aix-les-Bains, France, tel/fax +33 4 79 54 87 23, e.bonneville@aere.fr RIALHE Anne, Ph.-D in energy, from the Ecole des Mines de Paris, engineer from the Ecole supérieure de l energie et des matériaux, specialized in industrial energy, experience in research centers and in consulting companies, now CEO of the French company AERE, she has participated in the developing and implementation of some European Union s energy label for appliances, 18 rue G. Guynemer F-73100 Aix-les-Bains, France, tel/fax +33 4 79 54 87 23, a.rialhe@aere.fr, website www.aere.fr. October 2005 Page 13 of 14

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