Journal of Energy in Southern Africa 22(1): 42–54 DOI: http://dx.doi.org/10.17159/2413-3051/2011/v22i1a3201

Green certificate trading

Kerri Brick Environmental Policy Research Unit, University of Cape Town

Martine Visser School of Economics, University of Cape Town

Abstract on Climate Change (UNFCCC), which was opened Policies to promote renewable electricity are for signature in 1992. ‘The primary objective of the increasingly seen as a way to reduce the negative UNFCCC is to achieve stabilisation of the concen- environmental impacts associated with electricity trations of GHG in the atmosphere at a level that consumption and meet growing electricity demand. would prevent dangerous anthropogenic interfer- This paper reviews the international experience ence with the climate system’ (UNFCCC, 1992). As with one such policy, namely, renewable energy cer- South Africa ratified the UNFCCC in 1997, the tificates, and considers important design aspects of country is entitled to apply for financial assistance a national green certificate system. Within a South from the Global Environmental Facility for climate African context, a green certificate system would change related activities. provide a mechanism with which to verify compli- The Kyoto Protocol,1 a legal instrument under ance with any future renewable energy obligations, the framework of the Convention, sets binding tar- and would encourage renewable electricity genera- gets under which industrialised (Annex I) countries tion in the current monopoly environment. In terms must reduce greenhouse gas emissions by an aver- of a national green certificate framework, interna- age of five percent against 1990 levels over the peri- tional experience has shown that renewable energy od 2008-2012 (UNFCCC, 1997). The Kyoto certificates must be both accredited and standard- Protocol is the first and only binding international ized, with enforcement of penalties for non-compli- agreement to set targets for the reduction of green- ance with renewable energy quotas. Above all, a house gas emissions (Fakir and Nicol, 2008). long-term and stable policy environment is crucial In March 2002, South Africa acceded to the for developing renewable energy markets. Protocol. While the Protocol does not commit non- Keywords: renewable energy; tradable renewable Annex I (developing) economies such as South energy certificates Africa to quantified emission reduction targets over the period 2008-2012, there is potential for emis- sion reduction through the Clean Development Mechanism (CDM) which promotes emission reductions between non-Annex I countries and 1. Introduction: international and domestic Annex I countries. The CDM facilitates Annex I context investment in emission-reducing projects in non- Strong action is needed to reduce global green- Annex I economies. In this way, Annex I countries house gas (GHG) emissions and reverse the trend are able to obtain carbon credits to enable them to towards higher global temperatures (Stern Review, meet their emissions reduction targets. As such, the 2007). Given the threat to the climate from fossil CDM supports sustainable development with fuels, a focus on clean energy and energy efficiency respect to GHG emissions in developing countries is growing (DEAT, 2008). Increasing the share of while helping Annex I countries to comply with their renewable energy in terms of the national energy Kyoto Protocol commitments and reducing the mix is rising to the top of political agendas world- overall level of GHG emissions (DME, 2003; Fakir wide. and Nicol, 2008). The Intergovernmental Negotiating Committee South Africa is very dependent on fossil fuels as for a Framework Convention on Climate Change a primary energy source. Specifically, around 90 drafted the United Nations Framework Convention percent of energy is derived from low cost coal

42 Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 (DEAT, 2008) . Furthermore, 93 percent of electrici - environmental degradation, such as air pollution ty generation is based on coal (Winkler, 2005). and climate change. The ‘polluter pays ’ principle South Africa is ranked 19 th in terms of world emis - states that the party responsible for such pollution sions (based on absolute totals for six GHGs 2 in must pay for the negative environmental impacts 2000) contributing 1.1 percent of the global emis - caused. There is an internalisation of external costs sions total, and is ranked 13 th in terms of the carbon if the polluter pays adequately for any environmen - intensity of electricity production (CAIT, 2009). In tal damage caused. When external costs, such as air the 2003 White Paper on Renewable Energy, while pollution, are not internalised, the market mecha - recognizing South Africa’s dependence on fossil nism fails to secure an optimal allocation of fuels to meet energy requirements, the state resources. This is because the prices of goods with acknowledged the growing need for South Africa to large external costs are understated when these become a responsible ‘global neighbour ’, amid external costs are not internalised. As such, these mounting concerns about global climate change goods are over -consumed relative to the optimal (DME, 2003) . level of consumption for the wellbeing of society. In this context, the 2003 White Paper on The internalisation of external costs is therefore a Renewable Energy sets out government’s vision for necessary pre-condition for the optimal allocation promoting renewable energy in South Africa : of resources. When these externalities are inter - nalised, energy production technologies will be allo - Government’s long-term goal is the establish - cated by the market according to their social costs, ment of a renewable energy industry producing and the price of goods (electricity) will reflect their modern energy carriers that will offer in future true cost (Ragwitz et al ., 2006). years a sustainable, fully non-subsidised alterna - The European Commission has evaluated the tive to fossil fuels. The proportion of final ener - external costs of different energy systems. The gy consumption currently provided by renew - Commission’s ExternE project on external costs able energy has come about largely as a result of estimated that the cost of producing electricity from poverty (e.g. fuelwood and animal waste used coal or oil in the European Union would double for cooking and heating). To get started on a and the cost of producing electricity from gas would deliberate path towards this goal, the increase by 30 percent if external costs, in the form Government’s medium-term (10-year) target is: of damage to environment and health, were taken 10 000 GWh renewable energy contribution to into account (Ragwitz et al ., 2006). final energy consumption by 2013, to be pro - Renewable energy sources decrease pollution, duced mainly from biomass, wind, solar and contribute to the achievement of the Kyoto Protocol small-scale hydro… This is approximately 4% climate change mitigation goals, allow countries to (1667 MW) of the projected electricity demand improve security of energy supply by reducing fos - for 2013 (41539 MW) . (DME, 2003: ix) sil fuel dependency and provide numerous socioe - conomic opportunities such as investment, devel - This paper proceeds as follows: Section 2 briefly opment and job creation. Yet, despite these many outlines the policy instruments available for the pro - benefits, renewable energy competes with conven - motion of renewable energy sources, while section tional electricity on an unequal playing field amid a 3 discusses green certificate trading in more detail, failure to internalize the negative externalities asso - including the green certificate market in South ciated with conventional energy production. Public Africa at present . Section 4 describes the interna - support is thus needed to level the playing field and tional implementation of renewable energy support promote the market penetration of renewable ener - mechanisms. The lessons learnt from this experi - gy sources (Gonzalez, 2007) . ence in terms of design suggestions for the devel - In many countries, particularly in Europe, the opment of a South African TREC framework are main policy instrument used to support renewable detailed in Section 5. Also from international expe - electricity 3 deployment is the feed-in tariff. In this rience, Section 6 provides a comparison of a feed- system, a premium price is paid for all qualifying in tariff scheme and a quota obligation system com - renewable electricity delivered to the grid. Utilities bined with tradable green certificates. Finally, the are obliged to purchase this electricity at the set interaction between emission trading schemes and price – which is determined by the state. Given that renewable energy promotion systems are outlined the costs of generation differ across the spectrum of in Section 7 . renewable energy technologies, the feed-in tariff usually differs by technology and is provided for a 2. Policy instruments for the promotion of specified time period. The feed-in tariff may also renewable energy decrease over time in line with reductions in the While energy is critical to all aspects of South cost of renewable energy generation. Theoretically, Africa’s economic and social development, the way by setting the price but not the quantity of electrici - in which it is produced and used can contribute to ty produced, it is not known in advance how much

Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 43 renewable energy will be generated amid the ding procedure leads to unrealistically low bids – scheme. However, the stability of a set price – given resulting in funds being committed to projects which that the tariff is high enough – can result in sus - do not come to fruition. (Linden et al ., 2005) tained growth in renewable energy generation. Additional measures can be used in conjunction Conversely, the main criticism of the scheme is that with the main instruments mentioned above to too high a price may result in excessive producer ensure that the objectives for specific renewable surplus at the expense of electricity consumers energy technologies are met: financial subsidies for (Linden et al ., 2005). renewable energy technologies as specific $/kW Feed-in tariffs are used in many EU-25 member grants or grants specified as a percentage of total states, as will be discussed later. This system has investment; tax incentives such as tax refunds for had success in the deployment of wind, biomass renewable electricity , energy tax exemption for and solar energy in Germany, Denmark and Spain. renewable electricity, reduced VAT rates for renew - It is noted that the main advantage of the system as able electricity and the exemption of renewable evidenced in these countries is certainty around the energy-related investments from income or corpo - duration of financial support – which ultimately rate taxes. Green marketing systems in which a pre - reduces the risk of investment (Ragwitz et al ., 2006). mium on electricity voluntarily purchased by con - The use of quota obligation schemes has gained sumers is transferred to renewable energy genera - in popularity in recent years. In a quota obligation tors to cover the additional generation costs associ - system – also referred to as a renewable obligation, ated with renewable energy (Linden et al ., 2005). 5 renewable portfolio standard (RPS) or renewable As evident from Table 1, policy instruments can energy target – a minimum share of renewable elec - be classified in terms of whether they are price - or tricity is imposed on producers, suppliers or con - quantity-based instruments . sumers. The implementation of an obligation sys - tem typically involves a penalty for non-compliance Table 1: Classification of policy measures to ensure that obligated parties meet their renew - Source: Held and Ragwitz (2006) able energy purchase obligations. The obligation Priced-based Quantity-based scheme is often (but not necessarily) combined with mechanisms mechanisms tradable green certificates to simplify the burden of Feed-in tariff Quota combined with TGC verifying compliance with the obligation and to Fiscal incentives Tender schemes enable flexibility in achieving compliance. Quota Investment grants obligations combined with green certificates are used in Belgium, Italy, Sweden, UK and Poland, while 25 states in the United States , and Washington DC , have mandatory RPS obligations – 3. Green certificate trading with most RPS programmes incorporating the use TRECs – also known as renewable energy certifi - of tradable renewable energy certificates (TRECs) cates (RECs), green certificates or green tags, repre - (Linden et al ., 2005; Ragwitz et al ., 2006). 4 sent the renewable value or ‘greenness ’ of electrici - A third category of renewable energy promotion ty produced from renewable sources, and are used systems is the tender scheme. In such a system, to simplify the burden of verifying compliance with renewable energy developers compete for access to renewable energy targets and provide flexibility in power purchase agreements (and/or government meeting the target (Linden et al ., 2005). TRECS administered funds) through a competitive, govern - can be banked, traded or consumed (redeemed), ment administered bidding process. The tenders and can be sold bundled with the underlying phys - can be differentiated according to different renew - ical electricity or separately to it (Linden et al ., able energy technologies. Contracts are awarded to 2005). According to Morthorst (2001) , the idea the most competitive bids within each technology behind this policy scheme is to use market forces to band. Electricity utilities are often obliged to buy the determine the additional payment to investors in electricity at the winning-bid-price. Tendering renewable energy technologies. Therefore, the pay - schemes of this kind have been used in, amongst ments to renewable generators consist of two parts: others, the UK, Ireland, France, the US and China first, the sale of electricity to an energy utility such (Linden et al ., 2005). as Eskom by power purchase agreement and, sec - Although bidding processes are cost efficient , ondly, the sale of green certificates. The generated given that they stimulate competition among electricity and the certificates are traded on separate renewable energy generators, they have been less markets – the financial certificate market and the successful in promoting renewable energy relative physical electricity market. Obligated market actors to feed-in tariffs. This is likely due to uncertainty in are able to purchase green certificates from the the market arising from the intermittency of the ten - financial certificate market to meet renewable ener - ders or the complexities of the bidding procedures gy obligations (GreenX Energy, 2008; Morthorst, themselves. Furthermore, it is argued that the bid - 2001) . By providing a revenue stream for develop -

44 Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 ers, green certificate trading theoretically stimulates this manner can be used in the reporting of envi - investment in renewable energy projects and facili - ronmental performance. Conversely, in mandatory tates the expansion of the renewable energy gener - markets, where producers or consumers are obli - ation industry (Mitchell and Anderson, 2000). gated to produce or consume specified quantities of Under a renewable energy obligation system, renewable energy, TRECs provide a mechanism for demand for renewable electricity from obligated the verification and monitoring of compliance with market participants fuels demand for TRECs. In such obligations. Importantly, as TRECs can be practice, TRECs could be purchased by obligated used in both a voluntary or mandatory policy envi - market participants directly from registered produc - ronment, the system provides a useful bridging ers or from brokers and other intermediaries. In mechanism between the two (DME, 2007) . order to verify compliance with the obligation, obli - gated market participants must hand over the req - 3.1 Life cycle of a TREC uisite number of certificates to the monitoring The life cycle of a TREC consists of four stages, authority (typically on an annual basis). In this con - specifically: registration of the generating device, text, green certificates act as an accounting instru - issuing, trading and redemption of the certificate. ment which verifies whether the obligation has been These four stages are briefly discussed below. met (Linden et al ., 2005). Accreditation/registration: Renewable energy The price of a TREC is a function of both the generators apply for accreditation. Once verified, specified renewable energy target (Q) and the the plant becomes an accredited TREC generator marginal cost of generating renewable energy and is registered in the TREC system register as sources (MC RE ) is given in Figure 1. As is evident such (DME, 2007) . from the figure, TRECs are priced at the differential Issuing and verification of TREC : After the green between the electricity tariff (P e) and the marginal energy is produced and verified by the Issuing cost of renewable energy generation (at the quota Body , the generator receives certificates for a spec - level ) (González, 2007) . Without a TREC system, ified quantity of renewable energy . Each certificate given the electricity tariff, P e, renewable electricity is uniquely identifiable, certifies the quantity and would be produced up to A . In practice, adminis - type of green electricity produced and contains tration and marketing costs are included in the final standard information such as a unique certificate TREC price . (GreenX Energy, 2008) .Generators number, generation plant identity, time of issue, with lower marginal cost curves will be able to sell type of technology and date of expiry (GreenX their TRECs at a lower price (Mitchell and Energy , 2008). The TRECs are created as electron - Anderson, 2000). Delimatsis (2007 ) notes that ic records in the TREC register and are credited to TREC prices will depend on the type of renewable the register account of the generator (Mitchell and technology and the interaction of demand and sup - Anderson, 2000) . ply (for example , coupling inelastic demand with Trading and transferring of TRECs : The where - unstable electricity production due to weather con - abouts of the electronic certificate is registered, tracked and monitored from the point of issue, through trades and exchanges to redemption (Mitchell and Anderson, 2000) . This ongoing regis - tration of the certificate will guard against double counting. Trading can occur until such time as the TREC is redeemed, exported , or expired (DME, 2007) . Withdrawal from circulation : A TREC is said to have been redeemed once it has been consumed in fulfilment of a renewable energy obligation. At this stage, the TREC is withdrawn from circulation (Mitchell and Anderson, 2000) .

3.2 Elements of a TREC system ditions) . The essential elements of a TREC system can be Figure 1: TREC-based quota system broadly categorized as, firstly, a system of gover - Source: González, 2007; Haas et al., 2004; nance , secondly, the rules by which certificates are Mitchell & Anderson, 2000 traded and, thirdly, the overall institutional context within which the system is developed (DME, 2007). TREC systems can be either voluntary or These three elements are briefly discussed. For a mandatory. In a voluntary policy environment, more detailed exposition, the reader is referred to green certificates are used to track and verify green the DME (2007). energy supply. The procurement of green energy in The system of governance refers to mandatory

Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 45 versus voluntary policy contexts. In a mandatory untary and in its infancy. The South African policy environment, the legislated TREC system National Tradable Renewable Energy Certificate provides verification and monitoring of compliance Team (SANTRECT) was formed by the Department with government legislated obligations. Conversely, of Minerals and Energy in March 2008 (DME, voluntary TREC systems are established – with or 2008). SANTRECT is charged with the responsibil - without government involvement – by market par - ity of facilitating and coordinating the establishment ticipants (DME, 2007) . of the South African TREC Issuing Body (SATIB). A TREC system requires clearly defined system SATIB, which is in the process of formation, will be rules of operation . The Renewable Energy Certi- the governance authority for the renewable indus - ficate System (RECS) is currently the only interna - try, and will be responsible for registering, issuing, tional TREC issuing and trading system. RECS is an transferring and redeeming green certificates. umbrella organisation which governs an association SATIB will be based on the European AIB (GreenX of independent Issuing Bodies called the Assoc- Energy, 2008) . iation of Issuing Bodies (AIB) . The Principles and SANTRECT is intending on registering the Rules of Operation (PRO), previously known as the Issuing Body by March 2009 (DME, 2008). Basic Commitment, was developed by the AIB and Currently, the registration of renewable energy pro - sets out the common international standards that all duction devices is undertaken by Nano Energy – AIB members must subscribe to (AIB, 2008). The which has been operating as the Interim TREC PRO ‘is one of the cornerstones of TRECs in the Issuing Body since 2005 as part of the physical world and could be defined as the basis of TRECs green power voluntary market pilot project and the in Europe, it is linked to all TRECs worldwide and emerging renewable energy certificate voluntary has now also been adopted by the USA to form the trading initiative. Agreements have been put in basis of their TRECs verification, monitoring, track - place for the operation of an interim central regis - ing and control system ’ (DME, 2007 ). The PRO tration database by Amatola Green Power and prescribes a minimum set of criteria for the creation, GreenX Energy. Renewable energy device audits issue, transfer and redemption of certificates to and registrations have been taking place since May which all RECS Issuing Bodies must subscribe 2005 – with six devices registered at September (DME, 2007) . 2007 (Nano Energy, 2007) . Two groups of institutions are relevant when considering the institutional set-up of a TREC sys - 3.4 Motivation for a national TREC system tem, namely, assorted market participants and the TRECs can be used to track and verify green ener - TREC Issuing Body: TREC market participants gy supply. Importantly, as TRECs can be used in include renewable energy generators (TREC pro - both a voluntary or mandatory policy environment, ducers), TREC traders and TREC consumers. The the national TREC system will bridge the transition Issuing Body, as discussed, is the organisation to a possible future mandatory TREC system and responsible for the implementation of the rules and provide a mechanism with which to monitor com - procedures of the TREC system. The Issuing Body pliance with future renewable energy obligations is responsible for accreditation of renewable energy (DME, 2007) . generators via a physical device audit; registration The purchase of green attributes separate from of accredited renewable energy generators; issuing the underlying physical electricity avoids the com - of TRECs in market participant accounts in a cen - plexities and barriers that are associated with the tral database; operating the TREC register and physical trade of power in a monopoly environ - administering market participant accounts; transfer - ment. As such, a TREC system will allow for the ring TRECs; facilitating the international transfer of proliferation of the renewable energy industry while TRECs where compatible; redeeming certificates; these regulatory issues are resolved and developed and ongoing monitoring, development and evalua - (DME, 2007) . Importantly, the verification of green tion of the TREC system (DME, 2007). power provides a credible platform from which indi - The institutional setup of the Issuing Body must viduals and organisations can demonstrate a com - be sufficiently entrenched so as to allow for legal mitment to environmentally sustainable purchases recourse in the event that dispute resolution is and consumption. A TREC system will enable mar - required and/or in oversight of its operational activ - ket participants to transform this commitment into ities. For the TREC system to be both credible and tangible initiatives and projects via auditable finan - reliable, it is important that the Issuing Body acts cial transactions (GreenX Energy) . As this green cer - independently from the market participants and tificate market grows, there is increasingly a need must not have a vested interest in the TREC market for coordination among parties issuing, trading and (DME, 2007) . selling certificates so as to uphold the integrity of the TREC market, build consumer confidence and pre - 3.3 Green certificate trading in South Africa vent double counting and fraudulent claims (DME, The TREC market in South Africa at present is vol - 2007) ..

46 Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 4. International implementation of renewable policy instrument in any EU-25 member state. It is energy support mechanisms evident that investment incentives are used by var - The section provides an overview of the policy ious countries as supplementary instruments. instruments used in Europe, the United States and Australia. Experiences from the international imple - 4.1.2 The Renewable Energy Certificate System mentation of these policy instruments will inform RECS is an international, voluntary TREC issuing our own recommendations for the development of and trading system operating in Europe with over a national TREC system. 200 members in over 24 European countries (RECS, 2008). The system was created to stimulate 4.1 Europe global renewable energy development, advocate 4.1.1 EU-15 member states the usage of a standard certificate as evidence of Table 2 provides an overview of the main policies the production of renewable energy , and provide a instruments used to support renewable electricity in methodology which facilitates renewable energy EU-15 member states. Figure 2indicates the evolu - trade (RECS, 2008). As has been previously men - tion of the main support instruments in the EU-15 tioned, RECS is an umbrella organisation which for the period 1997–2005. As evident from the fig - governs the AIB – an organisation of individual ure, only eight countries did not have a major poli - TREC issuers (DME, 2007). The reader is referred cy shift in this period (Haas et al ., 2007a). Quota to Section 3 for a brief discussion of the PRO: a regulation in conjunction with tradable green certifi - framework developed by the AIB which sets out the cates has recently replaced existing policy instru - mandatory standards to which all AIB members ments in Belgium, Italy, Sweden and the UK. must subscribe. Tender schemes are not used as the dominating

Figure 2: Evolution of the main renewable energy policy support scheme in EU-15 member states Source: Haas, Held, Resch, Ragwitz, Faber & Huber (2007a)

Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 47 Table 2: Overview of the main policies for (Wiser and Barbose, 2008) have mandatory RPS renewable electricity in EU-15 member states obligations , while four additional states have volun - Source: Ragwitz et al. (2006) tary renewable energy standards. The amount of Country Main electricity support scheme nationwide load covered by existing mandatory Austria Feed-in tariffs combined with regional RPS programmes (including those not fully imple - investment incentives mented as yet) is roughly 46% (Wiser and Barbose, Belgium Quota obligation system combined with 2008). Most RPS programmes incorporate the use TGC and minimum prices for renewable of tradable renewable energy certificates (RECs) to electricity increase flexibility, reduce compliance costs and Denmark Feed-in tariffs facilitate compliance tracking . It is recognized that Finland Energy tax exemption combined with the application of RECs has contributed significant - investment incentives ly towards the achievement of RPS targets, with the overall level of RPS compliance in 2006 estimated France Feed-in tariffs at around 94% (Wiser and Barbose, 2008 ; Wiser et Germany Feed-in tariffs al ., 2007). Greece Feed-in tariffs combined with investment incentives 4.3 Australia Ireland Tendering scheme (to be replace by a The Australian Government introduced a Man- feed-in tariff scheme) datory Renewable Energy Target (MRET) scheme in Italy Quota obligation system combined with 2001 as part of a broader government response to TGC climate change. The MRET scheme aims to Luxembourg Feed-in tariffs increase the generation of electricity from renew - Netherlands Feed-in tariffs able sources and reduce greenhouse gas emissions. Portugal Feed-in tariffs combined with investment The Renewable Energy (Electricity) Act of 2000 incentives mandates the generation of an additional 9500 Spain Feed-in tariffs GWh of renewable energy per year by 2010 –2020 . MRET operates by imposing a binding obligation to Sweden Quota obligation system combined with support renewable electricity generation on large TGC wholesaler purchasers of electricity, for example, an UK Quota obligation system combined with electricity retailer buying wholesale electricity to TGC meet retail sale obligations . The MRET is backed by a TREC system. If a liable party does not discharge 4.2 United States their liability by surrendering TRECs, a Renewable The Renewables Portfolio Standard (RPS) system Energy Shortfall Charge (penalty) of $40 per TREC aims to maintain or increase renewable energy con - applies (Australian Government , 2008; Linden et tribution to electricity supply .6 RPS typically impos - al ., 2005). es a percentage renewable energy obligation on In 2007 , under the national renewable energy retail electricity suppliers. Most RPS policies are leg - target (RET) scheme , the Australian Government islated. Renewable energy purchase obligations committed to ensuring that at least 20 per cent of vary significantly among states from 2% – 30% of Australia’s electricity supply (approximately 60 000 retail sales. Currently, 25 states and Washington DC GWh) comes from renewable energy sources by

Figure 3: Existing state RPS policies and non-binding renewable energy goals Source: Renewables Portfolio Standards in the United States (April 2008)

48 Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 2020. Accordingly, the MRET will likely increase to encourage a steady rate of renewable energy 45 000 GWh to ensure that – together with the deployment, the design of the TREC system must approximately 15 000 GWh of existing renewable aim to reduce the likelihood of TREC price hikes. capacity – Australia reaches the 20 per cent target Price hikes and associated market volatility are by 2020. Ultimately the national MRET and existing more likely to occur the longer the time horizon state-based targets will be brought into a single between redemption dates and the shorter the national scheme (COAG Working Group on redemption period. While more frequent redemp - Climate Change and Water, 2008) . tion dates are likely to have a smoothing effect in The Australian Department of Minerals and this regard, this benefit must be considered against Energy (2007 : 45 ) notes that by establishing MRET the possibility of higher transaction costs (Mitchell as a mandatory scheme : and Anderson, 2000) . In a bid to reduce the likelihood of price hikes, backed up by legislation and regulation – includ - the following design options can be considered ing monitoring using a TREC-based system and (Mitchell and Anderson, 2000): penalties for non-compliance – an effective and • Banking: Where market participants can store transparent implementation has been achieved. surplus certificates (produced or procured) in .. . The experience with the scheme confirms … the current redemption period for use in future that by ensuring a solid ‘paper trail ’ available redemption periods; through an internet based publicly accessible • Borrowing: Where actors with a shortfall of registry, monitoring and evaluation is significant - TRECs are able to reduce their target in the cur - ly facilitated, and data quality and accuracy rent redemption period by adding to their target greatly strengthened . in future redemption periods. Obligatees are thus able to defer purchases in the current com - 5. Basic design issues and concepts: pliance period, conditional on making up the lessons from the international experience; shortfall in the subsequent compliance period framework for a national TGC scheme (Schwartz, 2006). Together, banking and bor - In this section we indicate the basic design require - rowing provide the opportunity for obligatees to ments for a TREC system and discuss some addi - purchase TRECs when prices are low (Schwartz, tional design elements that have emerged from the 2006); international experience. • Rolling redemption periods: Where market par - Renewable electricity should be accredited to ticipants are able to meet their target over a pro - foster consumer confidence in green electricity , par - longed period. If participants can meet their tar - ticularly in the case of voluntary TREC systems. In get over a five year period, their total TRECs tar - addition, the principle that there is equivalence get would be five times the size of an annual tar - between TRECs (standardisation), regardless of get, but they will be accorded flexibility in how their means of production, is fundamental to the they meet it. For example, years with low wind entire trading system. The accreditation and stan - levels can be offset by years with higher wind dardization body does not have to be linked to the levels. Such a system would require rolling government (as in the case of RECS). In addition, deadlines and annual intermediate targets to the national system should be in accordance with prevent a large price hike at the end of the five any international system so that international trade year period; and in certificates is a possibility. The benefits of inter - • TREC expiry dates: TRECs can be designed national trade in TRECs include: greater access to with an expiry date to ensure that they are used renewable electricity; efficiency gains amid access within a certain time period after their produc - to renewable technologies that are less expensive in tion. A short TREC lifetime encourages rapid other countries; if a TREC is associated with some deployment while an infinite TREC lifetime can measure of carbon abated, then buyers of TRECs be used to reassure the market . can receive a carbon credit (the reader is referred to Morthorst (2000) for more on this (Mitchell and In this context, Vogstad (2005) notes that TREC Anderson, 2000) . prices will be volatile and subject to weather fluctu - The time aspects of TREC systems are important ations if flexible mechanisms such as borrowing and given that they can have a significant impact on the banking are not implemented. purchasing behaviour of market participants and The enforcement of penalties in the case of non- thus on the price of green certificates. For example, compliance must be guaranteed for the system to a fixed annual obligation date might induce a rush operate optimally ; in addition, in order to incen - to meet obligation targets as the deadline tivise market actors to fulfil their quota obligation, approached. This rush could result in inflated prices the penalty for non-compliance should be signifi - and increased market volatility. In a bid to build cantly higher than the expected market price for confidence in renewable energy markets and green certificates (Ragwitz et al ., 2006). In the case

Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 49 of a TREC with no price cap, the penalty can be tricity. Risk is lower in the context of a feed-in tariff constructed as a flexible cost such as TREC + X, scheme where both the magnitude and duration of where X is the penalty over and above the TREC support is known. Conversely, a high -risk premium market price. The penalty, also known as the buy exists under a TREC scenario as the income from out price, can be diverted to obligatees who have the sale of TRECS is uncertain. Risks can be met their obligation (reducing their costs and decreased, however, by the implementation of a encouraging compliance) (Anderson and Mitchell, guaranteed price floor for TRECs or the allowance 2000) . of banking and borrowing of green certificates Based on extensive stakeholder consultation, (Ragwitz et al ., 2006). Ragwitz et al ., (2006: 20 ) conclude that a long -term Haas et al . (2007) show that the level of support and stable policy environment – irrespective of the – expressed in terms of green certificate prices – in instrument utilised – is the single most important Belgium, Italy, and the UK is significantly higher issue for success in developing renewable electricity than renewable energy generation costs. The rea - markets : son for the higher support level, while partly due to immature TGC markets, is due to ‘the non-technol - Whether it concerns a feed-in tariff based sup - ogy-specific application of the currently applied port system, quota obligation scheme or tax TGC-systems as well as in [ sic ] a higher risk premi - incentive, in order to be able to attract investors um requested by investors ’ (Hass et al . 2007: and project developers, in order to allow suffi - 2835)’ . This indicates the importance of taking cog - cient time for project planning, realisation and nisance of the factors discussed above when deter - all necessary steps of the authorisation proce - mining the framework of a national TREC scheme. dure a framework with long term stability is A single policy instrument is typically not suffi - highly desirable . cient to develop the full gambit of renewable ener - gy sources available in a particular country. The A long-term framework is a necessary condition majority of renewable investments are the product for the cost-effective promotion of renewable elec - of a combination of renewable energy support mea - tricity generation. As such, long term renewable sures as opposed to one single policy instrument. In energy targets – such as setting renewable electrici - addition to feed-in tariffs and quota obligations ty targets for the year 2020 – can be important in combined with TGCs, which are the principle sup - creating a stable investment environment (Ragwitz port schemes in Europe, various fiscal incentives, et al ., 2006), target setting, a long term framework and a stable The application of technology specific support policy environment have culminated in a stable can reduce transfer costs for society by increasing investment climate for selected technologies in renewable energy deployment as less mature tech - European markets (Ragwitz et al ., 2006). nologies receive a stimulus now – becoming avail - The DME (2007) feasibility report recommend - able to a larger extent in the future. A feed-in tariff ed the adoption of the Principles and Rules of is able to do this more easily than a uniform TREC Operation of the Association of Issuing Bodies : system with no additional support. With respect to a feed-in tariff scheme, differentiation between to provide a simple, clear, practical, and able to renewable technologies can be easily implemented be readily implemented, administratively effi - as the price level per technology can be set directly. cient method of operation and rules for South As such, when considering the TREC framework, Africa… These rules provide a clear definition of alternatives are available for the provision of tech - eligible TREC renewable energy resources and nology specific support: combine a quota obliga - technologies and the handling of each of these. tion/TREC system with other policy instruments As a tried and tested system, the PRO is man - such as investment grants or tax incentives; 7 value ageable yet robust, reducing the likelihood of a MWh of renewable electricity from different tech - error or fraud. It is complementary to and com - nologies differently where a MWh generated from a patible with existing policy, the legal and regula - less mature or less cost efficient technology are tory framework, and sustainable with minimum translated into a green certificate with a value high - external financial requirements beyond the ini - er than one MWh (Ragwitz et al ., 2006). tial start-up years prior to sufficient market vol - The risk assessment of investors with respect to ume. Furthermore, as the basis for many other a specific policy instrument affects the transfer costs international TREC systems, it is compatible for consumers, given that it is consumers who ulti - with and provides potential for co-operation mately pay for the associated investor risk. The risk with other prominent TREC systems. It specifies assessment of potential investors is influenced by the rights and duties of market players and the the stability and type of the support scheme. tasks that need to be assigned to various bodies. Specifically, risk is positively correlated with investor The rules include verification requirements and uncertainty in terms of the sale of renewable elec - procedures for the resolution of disputes. The

50 Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 PRO presents a clear definition of the content of enough incentives such as penalties for non the certificate and ensures that the benefits of compliance (Ragwitz et al ., 2006). renewable energy production are not double counted or sold several times. (DME, 200 7: 13) 7. Interaction between emissions trading and renewable energy promotion 6. Comparison of feed-in tariff and quota There is a significant distinction between schemes obligation combined with TGCs: lessons allowing for the trading of emission rights such as from international experience the Kyoto Protocol and schemes that develop a The following findings are drawn from a detailed framework for the trade of renewable energy (or analysis by Ragwitz et al ., (2006) of support ‘green’) certificates. In emission trading schemes schemes in EU-25 and EU-10 member states. The (ETSs ), the tradable item is an entitlement to reader is referred to the source for more informa - release a certain quantity of greenhouse gas emis - tion . sions into the atmosphere. Conversely, with regard to a scheme that allows for or mandates trade in 6.1 Feed-in tariffs ‘green’ certificates, governments impose an obliga - • Feed-in tariffs have proved successful in trigger - tion that a minimum share of the electricity gener - ing significant dissemination in renewable elec - ated or supplied to the retail consumer is derived tricity technologies in all countries in which they from renewable energy sources (Jensen and Skytte, have been implemented . 2003) . • A feed-in tariff is effective, flexible and fast in Despite this distinction, the explicit goal of terms of renewable electricity deployment, it is reducing carbon dioxide emissions creates a link easy to install and has minimal administration between policies that promote renewable energy costs . sources and other mitigation strategies like emis - • The instrument easily facilitates the provision of sions trading. A TREC system might well act as a technology specific support which helps to complement to an ETS. As ETS are technologically reduce transfer costs for consumers . neutral, they do not support a specific technology • A feed-in tariff does not promote competition but rather provide incentives for firms to use low- between investors. As such, it does not lead to cost abatement technologies. Conversely, renew - reductions in electricity costs. This can be cir - able energy promotion schemes directly support the cumvented to some extent by guaranteeing a proliferation of renewable energy technologies. long tariff duration, which will result in efficiency Renewable energy technologies are typically high- gains . cost emission mitigation alternatives and ETS pro - • Feed-in tariffs are economically efficient if the vides a positive albeit limited incentive to their tariff rates decline over time in line with the deployment. If the sole policy objective is carbon expected learning rate or a stepped feed-in tariff dioxide emissions reductions, the coexistence of is applied . ETS and renewable energy promotion schemes is • As feed-in tariffs are effective at relatively low arguably not recommended given that renewable producer profits, they provide deployment of energy generation is typically the more expensive renewable electricity at lowest costs for con - option in the mitigation of greenhouse gas emis - sumers (Haas et al ., 2007; Ragwitz et al ., 2006). sions. However, the additional socioeconomic and environmental benefits which accrue from renew - 6.2 Quota obligations based on tradable able energy deployment do provide a justification green certificates for the coexistence of both instruments. In addition, • The instrument encourages competition among the establishment of an ETS with a green certificate renewable electricity generators given that the system can stimulate the generation of energy from market is sufficiently large; renewable energy sources and create a shift towards • A quota obligation scheme in conjunction with renewable energy consumption (Gonzalez, 2007) . tradable certificates results in minimal total ETSs and renewable support schemes ultimate - renewable electricity costs but not minimal costs ly fulfil the same objective, namely the reduction of for consumers. This is because a higher risk pre - greenhouse gases. However, given that both policy mium is associated with a TGC scheme and a instruments are directed at the same market seg - TGC system cannot reduce producer surplus. ments, their interaction could lead to synergies as The implication is that such that a TGC scheme well as conflicts. Abrell and Weight (2008) quantita - is cost efficient in terms of installed renewable tively assess the interaction between an ETS and a electricity capacity but not in terms of costs tradable green certificate system using a static open borne by the consumer; economy computable general equilibrium (CGE) 8 • In contrast to a feed-in tariff scheme, a signifi - model. In addition to a business-as usual cant advantage of this system is that the target approach , which replicates the 2004 German econ - will be exactly reached – with the provision of omy, three different scenarios are modelled: Firstly,

Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011 51 an obligation for a 20 percent reduction in emis - 2. CO 2, CH 4, N 20 , PFCs, HFCs and SF 6 (CAIT, sions from the electricity sector and energy intensive 2009). industries, secondly, the aforementioned 20 percent 3. ‘Renewable electricity’ is used in this paper as a reduction target and a 20 percent renewable elec - short-hand for electricity generated from renew - tricity quota using tradable green certificates and, able energy sources. Electricity is an energy car - rier, and not renewable or non-renewable in thirdly, the aforementioned 20 percent reduction itself; it depends on the energy sources that is target and a 20 percent renewable electricity quota used to generate electricity. using feed-in tariffs. 4. The following hypothetical example illustrates In the first scenario of a 20 percent reduction in the dynamic of a quota obligation system: emissions, the carbon permit price is 3.43 /t CO 2. Assume the electricity market consistent of gen - The electricity price increases by two percent amid erators, suppliers and customers. Generators sell an increase in the cost of generation: compared to their electricity to suppliers who in turn sell it to a BAU approach (no regulation), emission regula - customers. Assume that 6 percent of supplied tion ultimately increases the marginal cost of fossil electricity must be renewable. In this example, fuel based generation which results in higher elec - all electricity suppliers must prove to the author - tricity prices. In response to the higher electricity ities that they have met this obligation by pro - price, electricity demand and supply decreases by ducing TRECs at year-end – one certificate for one percent and 1.6 percent, respectively. Both sce - each MegaWatt hour (MWh) of electricity sold. A narios, in which a renewable electricity quota is supplier who sold 1 000 000 MWh of electrici - imposed, are roughly identical. In both scenarios, ty during the specified period would have a renewable obligation of 60 000 MWh. If the the carbon permit price is reduced to zero, electrici - supplier fails to meet this obligation, he or she ty prices rise by one percent, electricity demand falls will likely have to pay a fine for every MWh sold by 0.72 percent and electricity supply falls by that was not renewable. If the supplier failed to roughly one percent. Both renewable policies lead supply any renewable electricity and the fine to a marginally higher welfare loss than the pure was R100, he would be fined R6 million. It thus emission reduction scenario as ‘electricity producers becomes very expensive not to comply with the deviate from their cost minimizing generation port - renewable energy target. (REF, 2008) . folio ’ (Abrell and Weigt, 2008: 11). There is a wel - 5. This system depends on the consumers’ willing - fare loss of 0.0019 percent in the first scenario, as ness to pay (WTP) for renewable electricity. The compared to 0.0209 percent and 0.0213 percent in WTP differs from country to country and is influ - the second and third renewable energy scenarios, enced by factors such as environmental aware - respectively. ness (Linden et al., 2005). Important conclusions can be drawn from this 6. It is important to note that RPS designs vary analysis. Firstly, renewable energy support instru - substantially across states. ments lead to a decrease in carbon prices (and ulti - 7. This approach can be problematic when the mately in the electricity price) as the increased share TREC system is implemented internationally. In of renewable energy decreases the demand for car - this case the TREC price is determined at the bon permits. The extreme result of a zero carbon international level while the additional technolo - permit price, as described, occurred because the gy specific support is set at the national level. As renewable electricity quota led to an excess supply such, countries that provide less additional sup - of carbon permits. The significant implication for port benefit from the international TREC price (Ragwitz et al., 2006). policy design is that carbon regulation becomes unnecessary if renewable electricity targets are set 8. ‘The model is based on the German input-out - too high (Abrell and Weigt, 2 008). put table of the year 2004… which identifies 71 industries and commodities. Furthermore, the In addition, the imposition of a renewable elec - German statistical office provides energy flows tricity quota in addition to an emission trading and emissions of the German economy… which scheme results in additional welfare losses to soci - are used to construct physical energy flows cor - ety. As such, the additional renewable electricity responding to value flows of the input-output support instrument must be justified. The authors table and carbon emissions’ (Abrell and Weigt: cite the learning effects associated with renewable 8). energy technologies as the standard justification (Abrell and Weigt, 2008) . Acknowledgements This paper, derived from a report, is the result of collaboration between the Energy Research Centre (ERC), Environmental Policy Research Unit (EPRU) Notes and Genesis Analytics. The ERC and EPRU are 1. The Kyoto Protocol was adopted on 11 both research units at the University of Cape Town. December 1997 and entered into force in The research by Genesis Analytics was commis - February 2005 (UNFCCC, 1997). sioned by the ERC, drawing on National Research

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Received 16 March 2009; revised 23 February 2011

54 Journal of Energy in Southern Africa • Vol 22 No 1 • February 2011