The first pan-European market for Guarantees of Origin

The first pan-European market for Guarantees of Origin

Guarantees of Origin (GOs) are central in the context of the energy transition. As the name already suggests, GOs are a tracking instrument confirming the origin of electricity. They also determine the quantity stemming from renewable production within the total of electricity that flows through the grid.

In the context of the energy transition, GOs therefore are an indispensable tool to promote the production and consumption of green electricity, by ensuring its traceability and to enable investments into renewables. 

The need for a transparent price signal

Thanks to the GOs mechanism, European consumers subscribing to a green electricity offer with their energy provider can be assured that the exact amount of electricity they consume has been injected from renewables into the grid. For this to happen, GOs need to change hands from producers to consumers via issuing bodies. As of today, these exchanges happen bilaterally, 

through Over-the-Counter (OTC) trading.
This means no standardisation, no optimisation of liquidity and most importantly, no transparent reference price. This is why EPEX SPOT announced in November 2021 its plans to launch pan-European spot auctions for GOs, in partnership with ECC and EEX. 

A market design challenge

Trading at an Exchange, with an anonymous market, brings numerous advantages. One major advantage is security provided by the clearing house. Trades at EPEX SPOT are cleared by ECC, who acts as central counterparty for all transactions. In case of default of a market participant, the other party they have been trading with is guaranteed to receive their payment or delivery of the product. A further important feature of Exchange-based trading is standardisation. This means standardisation of products, delivery rules, contract terms, counterparty prequalification policies and default procedures. And most importantly: Thanks to standardisation, a large number of transactions can be compared – a reference price emerges, based on liquid order books.

Therefore, standardisation is part and parcel of an efficient GO market, but also poses the major challenge to the market design: For the past two decades, the EU electricity market has been built on the stipulation that identical electrons flow in the grid, regardless of the production means. The energy transition has moved green generation capacities to the centre of attention, and the variety of available GOs reflects this: GOs for wind, hydro or solar generation, GOs that fall under certain subsidy schemes (or not) or that are from specific countries. How can liquidity be bundled while considering specific characteristics? How to avoid that the specificities of GOs split up the market, rendering it illiquid and inefficient?

The first pan-European market for Guarantees of Origin

The solution: A multi-dimensional market

The monthly EPEX SPOT GOs auction will be three-dimensional. That means that the product specifications take into account the following features: Generation technology (wind/solar hydro), country* (country 1/country 2 …) and subsidy scheme (subsidy/no subsidy). Market participants can either submit bids for generic products, meaning any type of technology, country of origin or subsidy scheme. Or they bid for specific GOs combining the different characteristics in their order. For instance: a specific product would be “Dutch/solar/no subsidy”. A generic product could be “all technologies/ all countries/ all subsidy schemes”. The market design also foresees a mix and pick specificity only for a country, or a technology, or a subsidy regime, or several of them.

The auction also considers the temporal dimension: A specific trading calendar allows buyers and sellers to procure GOs stemming from a specific production month, or from a larger period of time. This allows market participants to not only cope with all regulations within the EU, but also to meet demands that could go beyond EU regulation, and which we expressly want to accompany with this market setup.

*amongst a very wide range of European countries within the AIB / following EECS rules.

Bundle specific and generic demand in a single auction

The first pan-European market for Guarantees of Origin

This market design will maximise liquidity, the number of executed orders and maximise welfare through a dedicated algorithm. It has been developed in close cooperation with market participants.

What's next?

The market design that has been laid out is not set in stone, it is supposed to evolve according to the requirements of the market participants. With this GOs spot auction, EPEX SPOT aims at serving today’s market needs, while keeping a certain degree of flexibility, to keep serving the needs of tomorrow’s market. For instance, the auction could include additional criteria within a specificity (additional countries, more technologies) or include further specificities, and so on.

Building on solid EEX Group infrastructure

EEX Group has a track record in operating registries for Guarantees of Origin and organizing GO primary auctions on behalf of Member States. The anonymous exchange-based spot auction will be launched in 2022, take place once a month and be operated by EPEX SPOT. Payment and delivery will be performed by ECC and EEX, via the French registry.

This means that the new market will rely on the strong and diverse European trading community of EEX Group. Market participants can rely on EPEX SPOT’s membership and market rules. GOs from renewable production in selected and interconnected European Energy Certificate System countries will be tradable.

The first pan-European market for Guarantees of Origin
Monthly multilateral spot auctions
The first pan-European market for Guarantees of Origin
GOs from renewable production in selected interconnected AIB countries
The first pan-European market for Guarantees of Origin
Both specific and generic GOs tradable with several levels of specificity
The first pan-European market for Guarantees of Origin
Strong and diverse European trading community
The first pan-European market for Guarantees of Origin
Reliable EPEX SPOT membership and market community
The first pan-European market for Guarantees of Origin
Payement vs delivery performed by ECC and EEX

This joint market launch is planned for 2022. It is part of EEX Group’s ongoing efforts to support the energy transition with market-based instruments.