Blockchain based renewable energy certificates: How to make it real?
*When investing in green certificates the question of how these instruments work is often aised, since it’s impossible to track or influence the path taken by green energy once fed into a national electricity grid.*
*This article first appeared in ESI Africa Edition 4, 2018. You can read the full digital magazine here
Green Energy Certificates, also known as Renewable Energy Certificates (RECs) or Tradable Renewable Certificates, are instruments that prove a given amount of electricity was generated from a green source on behalf of a consumer and fed into the national grid. They are often purchased by energy consumers that aim at reducing or completely offsetting their emissions in electricity consumption.
It’s merely a matter of balancesheets and bottom lines. A consumer who purchases a green energy certificate is actually purchasing the proof that a given amount of electricity was generated from a green source on their behalf and fed into the grid. As they align their true consumption to the facial value of the certificates, they contribute to climate change mitigation by not consuming more than the amount of renewables fed into the grid. The mitigation impact is achieved holistically assuming that more renewables will be fed into the grid as more people claim and only consume the amount of renewables fed into the grid.
If there is no demand for the power generated by non-green sources, economic realities will balance the market. When properly implemented, green energy certificates can assist countries that aim at transforming their energy sector by catalysing the share of renewables in the generation mix. For instance, if all consumers in a country were to target and demand 70% renewables and if such demand would be backed by both willingness and ability to pay, the market will naturally tend to meet that demand on its own.
It’s not uncommon to hear that policy reforms are a prerequisite for helping a country to increase the share of renewables in their generation mix. While policy-based pathways have worked in many instances, and will certainly still work, they discount the opportunity today offered by the decentralised realm. Peer-to-peer transactions between renewable energy producers and consumers can certainly help the energy sector offset its carbon footprint, but it’s a scary thing for everyone, except for the blockchain enthusiast. The idea that utilities could lose their central roles worries regulators from the perspective of energy price volatility.
Policy makers see in the peer-to-peer opportunity a simple decapitation of utilities, resulting in fewer job counts. These concerns are relevant. There is however a cost in both fighting and adopting a change. Whichever cost is greater usually inspires what path is best. It’s difficult to look at energy price volatility in a peer-to-peer enabled energy market without asking questions about what options utilities have for survival. Especially in the present state where cost parity is almost achieved for clean technology and decentralised systems gain an increasing momentum. Shall we encourage more regulated PPAs that stress utilities’ balance sheets or rather more regulated service packages to customers that improve reliability?
Assuming there is an increasing demand for clean energy and assuming this demand becomes higher than the supply from green sources, producers of clean sources will be scarce and RECs will tend to become more expensive. But at the same time the commercial potential created by this instrument will encourage more investment in order to balance the demand for renewables. The result is a conducive environment that helps increase the share of renewables. A path which appears to be more sustainable than stressing the balance sheet of utilities through more PPAs.
*The price of green energy certificates*
As long as the demand for renewables is lower than the supply from green sources the price of green energy certificates tends to fall. A situation of oversupply from clean sources is however still far from achievable, since no country so far has crossed the bridge of creating sufficient system redundancy with renewables alone. This is despite the records in Europe’s spot markets in the past few years – telling a story of negative electricity prices on the transformation path towards 100% renewables. While electricity price volatility will surely be observed during the initial deployment stage of green energy certificates, the natural replenishment of renewable sources can only stabilise prices in the long run.
Whether for consumers, utilities or regulators, RECs are a powerful instrument on the decarbonisation path. They can also help developing countries address the wider questions around energy security and energy access as a stimulation mechanism for increasing the installed capacity while keeping utilities economically safe.
There are however a few prerequisites to any successful RECs programme:
– Trust must be established on the supply side that all units generated from green sources are well counted and the certification process is reliable. While this can easily be achieved for utility scale plants, technologies for Virtual Power Plants (VPPs) that aggregate distributed generation plants must comply with the expected levels of accuracy for these instruments. In the event that the amount of certified green energy is not the same as the amount fed into the grid, or into minigrids, the initial aim for off-setting carbon footprints is not met anymore. – Certificates must be unique for each package of service delivered. While the debate is ongoing whether a green energy certificate produced for instance by a power plant in Southern Africa can be used as an instrument to offset emissions for a factory in North Africa – knowing that there is no interconnection between the two but also knowing that emissions reduction is a global good – it’s very important that each green energy certificate, as a representation of a package of GHG reduction, is used only once. – Grid dispatch must give priority to energy from renewable sources. When for any reason this is not the case, consumers would still use ‘brown energy’ despite having green energy certificates at hand. This is an area where regulation will play a key role. – Demand forecasts should be reliable. 100% accuracy is never the point, but a level of reliability that can economically help avoid curtailment will already deliver value. The fact that industrial power consumers have developed a better ability to predict their demand probably explains why RECs are more popular with that segment of users.
*Here lies the argument for blockchain*
One major barrier has impeded the massive spread of green energy certificates. Wherever RECs exist, their acquisition still goes through central systems that require all manner of brokerage hurdles. Even in developed regulations where RECs are part of the daily discussion, or the normal electricity bill for some consumers, central authentication systems that establish the trust between parties are still brokering transactions. This is an opportunity for distributed ledgers, given the chance nowadays to leverage on an increasing demand for peer-to-peer transactions at all levels of the economy.
As evidenced now by crypto-currency records, authentication does not require central systems and works well on distributed ledgers. A blockchain for green energy certificates would solve a couple of issues:
1. The issue of accessibility: You may want to say for instance that the reading of this article was carbon neutral. But achieving that simple statement is not so straightforward for many today. What if achieving this was as easy as buying a simple green energy certificate token on a peer-to-peer market? 2. The issue of volume: Not everyone can consume 1MWh of electricity so easily. The minimum unit for existing green energy certificates is however 1MWh. Tokenising the certificates can potentially bring in more market participants and thus enhance the use of green energy certificates. 3. The issue of opportunity: A distributed ledger will naturally create a secondary retail market for green energy certificates.
Where do we go from here? Will the utility of tomorrow own a solar minigrid in Africa and sell a carbon emission offset package via a blockchain-based renewable energy certificate to flying global corporate executives on their way to China, or even directly to the airline? ESI