2020-03-03

Additionality – What Does it Mean Anyway?

The most relevant use of the term for us is related to emissions trading and especially determining the net CO2 reduction of CDM (Clean Development Mechanism) projects against a “business-as-usual”, baseline. That is what could be called “environmental additionality” as opposed to “project additionality” or “investment additionality”, which refer to whether a certain CDM project would have happened without CDM or other financing. This is pretty much where the agreeing on the meaning of the word stops and where the contesting begins. Let’s jump over that rabbit hole here, but those interested can read for example this series of papers.

Forgetting all the complexity underneath and assuming that additionality is something like a compound of long-term net CO2 reduction and avoidance of other externalities (CO2 is not the whole story), we can use it for energy certificates as well. If one of the reasons for producing energy from renewable sources is to avoid CO2 emissions, then additionality should mean avoidance of fossil generation. But what additional value does an energy certificate create if the originating windmill was financed by a generous feed-in tariff leaving the investors off with a hefty return on investment? What in the world is the baseline for a certain MWh of renewable energy produced, or, god forbid, a baseline for me buying and cancelling a certificate carrying that production attribute?

Additionality for Energy Certificates

If baseline is useless concept when dealing with energy certificates, do we have to scrap additionality as well? Using energy certificates must contribute to some sort of surplus compared to the “do-nothing” to be anything else than sale of indulgences. For example, according to Center for Resource Solutions a key element in additionality is regulative surplus: the additional benefit that voluntary buying of a certificates create on top of the surrounding regulation, support schemes, etc. What about technologies that do not need support or other government induced incentives because they are already at grid parity like on-shore wind in many places? Or devices with minimal operating expenses and having been there for ages like for example old Norwegian hydro. In these cases, investors don’t need the money from energy certificates to justify investments decisions, so is it useless to buy such certificates and greenwashing to use them?

Let’s forget certificates for a while and consider who or what is causing a new plant to be built, rewed and operated using renewable energy sources? In a simple model we have 3 actors: Entrepreneur, Investor and Customer. Government as a grantor of public support as well as buyers of energy and certificates would all in this simple model be bundled in Customer. Now, who to blame (positively, in case of green investment) for the production taking place? Entrepreneur, Investor and Customer are all necessary but not sufficient conditions for production to take place. Let’s analyse Customer further by dividing it into buyer of energy, buyer of origin, and possibly government as the support system operator.  The buyer of energy can be generally represented by the energy market and buyer of origin by the certificate market. Now, is the certificate market also a necessary but not sufficient condition for new RES to be produced making my certificate purchase additional? Let’s see.

Invisible Hand at Work during Closedown

Please bear with me while I go through one more important concept before getting into the actual business. Consider energy certificates as analogous to a choice between flight and train. Both will go regardless of your choice and the same CO2 is emitted. Also, both are already constructed including all the required infrastructure. The situation changes radically if everybody chooses train. The flights would get cancelled, smaller airport would suffice, and fewer airplanes would be needed. Don’t believe? Just look at the Flight Radar (this text is written at the time of COVID-19 lockdowns). It is Friday 9 am now, probably one of the busiest hours, and see: in Finland 3 small planes and a helicopter. Ok, Finland is a small country. Let’s look at Germany: altogether 17 passenger planes in Friday morning!

Figure 1: Flight radar at 2020-04-17 9:35

Now that we have proved that the invisible hand of the market really is at work at least when it comes to flights, what do we have to believe to believe that it also works for energy production via energy certificates? You can think about it for a while. Here is my list:

1. Certificates are exclusively used for energy disclosure (see part 2/4 Uniqueness).
2. A reasonably mature certificate market exists.

In principle these are the only conditions. If everybody wants to buy only renewable, then all production must be renewable. So there must be some sort of very powerful additionality even in a simple certificate market if only they are given the exclusivity to prove the origin! Moreover, if there is a mandatory energy disclosure that makes the mere share of renewables in the energy mix available to consumers instead of e.g. detailed information on production attributes, then additionality “happens” regardless of what kind of certificates I use as long as their colour is green.

Let that sink in. So, even if you buy certificates from supported 50-year-old hydro plant located in a place with only a theoretical physical connection or no connection at all, the additionality of your certificates usage is the same.

Pressure Cooker Model of Certificate Market

But wait a minute, regardless of how much green energy I buy, isn’t there always somebody who does not have any problem consuming fossils so me spending some extra for green colour just reallocates balances in energy suppliers’ Excels? Yes, but in a well-designed energy certification system it is just these reallocations that make the change as they accumulate.
We can view the ultimately inevitable greening of energy production analogous to cooking. Carrots, broccolis, meat, etc. are slowly boiling and get eventually cooked, some faster, some slower. The same way energy industry must become green when we run out of fossils and uranium or when the climate change is about to destroy our civilization at the latest. But we want the process to be faster, much faster. In the kitchen we can use a pressure cooker to get on the table 50-75% faster. With a normal pot a hotplate makes the water boil at 100 C and the raising of the temperature stops there as the water slowly steams out. If we seal the pot preventing the steam to come out, the pressure in the pot raises allowing the water temperature to go up to 120 C and hence cooking the food much faster.

In a similar vein, we can speed up energy transition by introducing a well-designed energy certification system and letting the market to do the job. So, what are the elements needed to build the pressure and keep it in? First of all, we need a certification scheme: the rules, procedures, organizational and technical vehicles to reliably issue, trade and use energy certificates. That is our hotplate. Then we need a strong enough pot to define the borders of the system and to deliver the heat to the water and food: a robust disclosure scheme: how energy origin is to be disclosed to those using energy. Disclosure scheme must cover all consumption including energy consumption related to claims regarding industrial products and it must make cancellation of certificates as the exclusive way to claim the origin of energy. To build the pressure we must seal the pot with a sturdy top. It literally prevents hot air to escape from the pot. In an energy certification system that is the residual mix: a calculation mechanism that makes an energy certification system closed one so that each produced energy attribute unit is used for disclosing exactly one unit of energy consumption. It makes somebody to consume all the fossil attributes produced and the green attributes to be consumed only once.

In addition to these basic elements, we need supporting structures to really keep our pressure cooker operating efficiently. We need regulation and supervision to make sure everybody plays according to the rules. We need standards to make sure the top fits the pot and the pot fits the plate. In energy certification system missing standards cause leakages and loopholes that efficiently prevent the pressure raising. I have given several examples of such design failures in the previous parts of this blog series. Regulation, standards and supervision must cover both certification and disclosure schemes.

Finally, to make the plate hot we need fire. That is the market: green tariffs, green PPAs and green corporate energy purchases. Fire alone without a hotplate and the cooker only burns and at best fumes away the inherent willingness to buy green. If the market sees a reliable hotplate and pressure cooker, it gets hungry and puts on more fire to accelerate the process.

Figure 2: The Pressure Cooker model

Final Words

Energy certification can be viewed as a complex, closed system, where different parts must fit together to make it work. If they do, energy certification greatly speeds up the energy transition by giving up unwanted ways of production. The prime mover of the system are consumers and corporations alike deciding the origin of energy they consume. The other vital parts of the system: certification scheme, disclosure scheme, residual mix, supporting regulation, supervision, and standards channel the buying decisions into investment decisions of the production asset owners and investors. Energy certification system is analogous to a pressure cooker as described above. If the system is broken, the top of the pot leaks, the good intentions of the prime movers do not convert into energy transition.

What is the lesson for a corporate buyer of energy certificates seeking additionality? Use you time analysing the certification system as a whole instead of whether to buy supported or unsupported, old or new, wind or solar, domestic or foreign, etc. If the certification system is well designed and working, your purchase is additional. Ok, that holds for mature market and systems like using EECS-GO in most EU countries, but what about my consumption in country X where they have a weak disclosure scheme and no residual mix? You can still make a change by buying certificates as long as the scheme provides reasonable uniqueness. The change will take longer but anything beats nothing. Farewell.