2020-03-03

Explicit double counting

Let’s start suspecting the worst scenario that my certificate is really deceptive: I own it, but the same production attribute is explicitly sold to others either in the form of another certificate, green PPA, or a premium power product. If I use this certificate, washing my hands might not be enough! What to look for? If a legal scheme is not well designed, it might, for example be possible to have a certificate issued for a production that is sold as green PPA to another client. Another case of explicit double counting is if the sanctions for breaking the rules of the scheme are low or supervisory of the scheme is too weak so producers and brokers can’t resist exploiting the obvious vulnerability. In rare cases a production device is registered for several same purpose certification schemes. In case of mature governmental schemes, such as EECS-GO, explicit double counting should not be a real worry.

Implicit double counting

Ok, I have a certificate, which is officially or by contractual means the sole carrier of the production attributes. In this case my certificate is good to use for disclosure on paper, faithful at the level of deeds. Unfortunately, there is a difference between deeds and thoughts. The underlying production attributes might still be loose and intimate their availability to others. The three typical modes of implicit double counting are 1) Double Disclosed Energy Products, 2) Bad Residual Mix, and 3) Flirting Production Attributes.

Double Disclosed Energy Products is a common source of implicit double counting if an energy supplier sells green products to some clients and publishes the mix of their total energy sales to other clients. In this case the buyers of the premium product should feel cheated, because they have paid for something that is double counted and given for free to others. Implicit double counting due to lack of proper energy products often happens in the EEA in countries which have implemented the electricity disclosure requirement in IEM directive 2009/72/EC, art 3 so that suppliers must disclose their total energy mix and can sell premium energy products to some clients. This design defect of the IEM is corrected in the new version (EU 2019/944, Annex I), which enforces the use of energy products for all customers. It still also has the requirement to publish the overall energy mix, though.

Bad Residual Mix includes production attributes that have been either sold explicitly to consumers or included also in other residual mixes used by other consumers. The most obvious case of bad residual mix is no residual mix. For example, in the early days of electricity disclosure in Finland it was allowed to use the Nordic production mix for disclosure for energy bought from an exchange. At the same time many producers got their green production certified with RECS certificates, which were then sold to the Netherlands by slick brokers to be used for a tax exception scheme. What a shame! Since then the disclosure regulation has been fixed and is currently rather good, although it still allows implicit double disclosed energy products.

A more subtle case of implicit double counting due to bad residual mix happens when a residual mix calculation does not catch all explicitly used production attributes. Again, there are several different cases and reasons, the two most archetypical being 1) inflating of the mix due to leaking disclosure area and 2) varying disclosure deadlines in same residual mix area. In the first case the issued (or exported or cancelled depending on the used residual mix model) certificates are removed from the residual mix, but its volume does not match with the volume of the untracked consumption. In practice this leads to inflation of the mix and double disclosure of green production attributes. Varying disclosure deadlines cause double counting when so called transaction based residual mix model is in use (see more about the differences between issuance based and transaction-based models here).  In a transaction-based model production attributes are added to a residual mix when they are imported in a country. This means that certificates can be imported before the disclosure and residual mix calculation date in a country and then exported to another country after the deadline in the first country, but before the deadline in the second. Then after they can be exported to yet another country before their deadline and sold as green energy product to consumers…  Transaction based model was used in Europe up to 2018 but was then replaced with the issuance-based model.

Flirting Production Attributes are explicitly traced via certificates and also communicated in the way that other consumers may assume consuming them. A danger for this type of implicit double counting is especially high in countries with very high share of renewable production, for example in Norway and Iceland. Even if a residual mix is properly calculated it might be for example that the consumers are shown both the residual mix and a production mix. The consumer typically doesn’t understand what a residual mix is, so they believe they are getting the production mix. In some cases, energy intensive industry may assume consuming the production mix of the country without cancelling respective energy certificates and use it for example for CO2 footprinting. For example, aluminium smelters have invested in Iceland and part of the equation has probably been the availability of cheap renewable energy. This is a fair assumption as 100% of the generation in Iceland is renewable and there is no physical connection to other countries. Enter energy certificates, residual mix and electricity disclosure, the smelters have ended up in a situation where the production attributes have flown to Europe and they are left to frown with a residual mix with just 10% of renewable. Similar thinking was behind the recent industry driven initiative in Norway to abandon the European GO system and to move to “production-based tracking system”. The initiative was soon buried and now very few want to remember it at all.

Double Counting for Different Purposes

There are cases when some sort of double counting is very hard to avoid. Usually it is because the surrounding regulation does no orchestrate well or may even play different songs. I must say right away that this case of double counting does not juggle on the same park with the cases above and being worried about it nears the line between healthy and unhealthy paranoia. Anyway, let’s run through 3 typical cases in the order or relevance.

Multiple certificates might carry same attributes for different purposes. There can be for example an attribute tracking certificates for disclosure purposes and support certificates for quota-based support system. If the regulation is not clear in for what different certificates can be used, the quota fulfilling party using support certificates might consider consuming equivalent amount of green power. This was the case for example during the early days of Swedish Elcertificate scheme, which was soon fixed by declaring that elcertificates don’t give any right to make claims about the origin of power.

National target accounting might not consider energy disclosure for consumers and certificate movements. For example, national targets in RED I directive (2009/28/EC) are defined so that moving guarantees of origin cross-border does not have any effect on targets. In fact, even if you would build an own windmill on the backyard, the government would count it in to its national target.

Investors may claim the same climate benefit. Even though energy attribute certificates are issued for certain production, the owner of the production device is still allowed to say that they own the production device and have generated that amount of green power. For example impact investors or green bond buyers might claim the same green production and CO2 avoidance that is included in the certificates used for electricity disclosure.

Historically there have been several attempts to create so-called dark green offerings. Creators of dark green offerings have tries to exempt them from other claims regardless of the purposes of such claims. This is accompleshed for example by unsubscribing from any government support schemes. From a corporate buyer point of view, finding a true dark green product is both difficult, expensive and useless. Instead, a well-orchestrated regulation that defines the intended use of certificates and regulates environmental claims is enough.

Final Words

Even though many of the examples above are from the past, double counting still happens. Explicit double counting in Europe is a rare species but not extinct. Implicit double counting exists, especially due to Double Disclosed Energy Products driven by the abovementioned common bug in the EU level regulation. It is, however endangered by the new version of the IEM directive. All in all, from a corporate buyer’s perspective using GOs to green consumption or backing green PPAs in the EEA is generally safe. Outside Europe the situation is totally different. From the double counting perspective, one viable option is to ex-domain cancel European GOs for consumption overseas. In that case the production attributes are at least correctly considered in the residual mix calculation. There might still be a risk of not being in line with the local regulation in the consumption country, but more on that in the next post.