About TRECs

Tradable Renewable Energy Certificate (TREC) schemes can be a cost-effective solution to drawbacks of the unequal spread of natural conditions and costs of renewable energy (RE) over countries and regions. These schemes can offer advantages for market players and governments in developing RE generation and meeting national RE targets. The trade of TREC across national boundaries provides producers a larger market and gives energy consumers the possibility to use RE regardless of the actual energy production in their immediate vicinity.

TRECs and Relevance of the Project

The International Benchmark study on Renewable Energy has shown that there is a potential to achieve the European target for RE (as described in the Directive 2001/77/EC “on the promotion of electricity produced from renewable energy sources in the internal electricity market”).

It has also shown the variation in costs - prices for one specific option can differ by a factor 2. However, a European wide approach could reduce these costs. This insight has kindled the development of TREC schemes and systems, first operational in the Netherlands for the Energy Utilities (MAP).

The European Market strives for one internal liberalised Energy market. This process has already started. The opening up of the TREC market, too, has made its start. For instance, financial incentives for international trade in renewable energy certificates, has led to a run on the (physical) import capacity in the Netherlands. Whether, these transactions have led and will lead to new renewable production cannot be guaranteed. It is likely that incentives meant to stimulate growth in renewable production also lead to growth in profits for stakeholders in the trading chain. In addition, for demand-side incentives for green electricity, it is crucial that the TREC mechanism is transparent and trustworthy because they are based on consumers’ trust.

National policies lean heavily on regional and local development of renewable energy. Huge efforts have been made in the last decade to get this train running, so to speak. As import of TRECs will become easier, this train may easily come to a grinding halt.

Since TRECs are by no means the only stimulation for RE production, their interaction with existing policy needs to be carefully considered and potential side effects minimised. Some of these side effects are highly undesirable with regard to the aims of the EU. Only a fully harmonised, open and transparent market will enable a European cost-effective approach. Financial support schemes generally aim for additional power. Schemes that differ principally, may easily lead to supporting the same power twice.

Within the SETREC project, the factors that define the working of RE and TREC markets will be elaborated. A distinction is made between “market drivers” and “market preconditions”.

Market Drivers

The market of RE and TRECs is driven by the following factors:

• Existing RE production capacity

• Local and cross border market demand for RE and TRECs

• RE and TREC policy schemes and market stimulation by governments, the EU and NGOs

• Individual Corporate strategies of (large) companies on the RE market

TREC market preconditions

Effective trade in RE and TREC requires the fulfilment of a number of preconditions:

• Rules for trade in TRECs
  – National rules;
  – Rules between EU member states, i.e. reciprocity;
  – Rules beyond EU member states;

• Possibilities for new RE production capacity
  – Physically: natural resources, space for realisation;
  – Economically: prices and profitability;
  – Other preconditions: regulations, legal conditions, prerequisite permits or authorisation.

• Possibilities for trade
  – Physically: transport capacity from production plant to consumers (where necessary), cross border transport capacity;
  – Institutional preconditions: (internationally) recognised issuing bodies for certificates, one or more exchanges, brokers, network, clearing facilities, etc.

What possible (unwanted) side-effects of TREC trade might arise?

A detailed answer to this question will emerge in the course of the project but a provisional list includes:

• Impediment of the realisation of new Renewable Energy production capacity
  – because of the issuing of TRECs for existing (old) RE capacity;
  – because of a change in definition of RE (for instance waste incineration);
  – because of import of RE or RE-certificates.

• Replacement by fossil production capacity in countries that export RE.

• “Green laundering” of polluting (nuclear or fossil fuel) electricity production capacity.

• Undermining of consumers’ (and other stakeholders’) trust in green claims.

• Ineffectiveness and inefficiency of government spending.

As soon as international trade in TRECs sets off, market players will look for, find and gain the largest profits. This means that TRECs and thus Renewable Energy credits will be ‘cashed in’ in those countries where the net profits will be the largest. In some cases – as is already experienced - this will lead to ‘free riding’ on governmental support schemes in one country and the under-spending of equally directed schemes in other countries. In effect, a form of policy competition arises in which countries are played off against one another.

Other effects that we are already witnessing in some countries are (amongst others):

• Market distortion – for instance the creation of artificial RE-markets through government stimulation.

• Inflation of certificate prices by local subsidisation.

• Scarcity of and rising prices for TREC in the home market of TREC exporting countries.

• Extreme rise in prices of cross border transport capacity.

There are strong signals that several of the above mentioned side effects actually occur at the moment. Some governments try to avoid these effects by taking measures that goes on – and against – the heart of the character of certificates (bringing together supply and demand at great distances by separating the green character from its physical energy).

The project is funded by the European Commission Altener Programme.