Mitigate Risk in the Energy Attribute Certificate Market

The advancement of renewable energy into the energy mix is also leading to increased volumes of Energy Attribute Certificates (EAC), known as Renewable Energy Certificates (REC) in North America, Guarantee of Origin (GOO) in Europe, and International RECs (I-REC) in other geographies. REC/GOOs are tradable and can deliver producers another income stream while also giving corporate consumers a viable way to reduce their environmental footprint. Demand for them will also impact price development. Moreover, REC/GOO markets are dynamic, evolving, and increasingly important for supporting renewables. Altogether, this has resulted in trading and risk managers, as well as accounting and legal departments paying attention to the associated risks in EAC deals. There is clear consensus that in general, Energy Trading and Risk Management (ETRM) systems fall short to manage this risk and process EACs reliably, and  a specialized solution is required: Mitigate Risk in the REC/GO Market: RECTracker

Markets for Energy Attribute Certificates (EAC) exist to encourage the supply of, and demand for, certified renewable energy. These markets for certified renewable energy are not only about providing income to producers that can be invested into new generation capacity or create another revenue stream; they are also about giving information that allows consumers to decide what kind of electricity (or green gas) they want to use.

An EAC, such as a GOO, is a green energy attribute certificate that guarantees that one MWh of electricity has been produced from renewable energy sources. EACs are tradable products with an expiration period of one year from the date of certification. Also, when the energy is delivered, the EAC is cancelled. If you own the EACs associated with your renewable energy project’s electricity output, you can sell these EACs to another party. In doing so, you forfeit the ability to make any claims about “using” renewable energy, but generate a new revenue stream. The revenue is a function of the system’s kWh output and the market price of EACs. Voluntary demand continues to grow, partly because of growing realization that EACs are the evidence behind renewable energy Power Purchase Agreements. In addition, regulatory changes, such as the growing adoption of full disclosure is driving the voluntary market. In the next 10 years, the EAC volume is projected to continue its current growth rate (accumulated volume between 2020 and 2030 12,000TWh), while prices are forecasted to more than double.

Traditional ETRM systems only provide the capability to capture EAC purchases or sales, not the underlying attributes (technology, location etc.). Because EACs get cancelled and have expiration dates, there is no single overview of the total current inventory. That brings us to one risk: Contract Risk.

When it comes to delivery of EACs, a trader can only deliver what he has available across the various registry accounts. Contract Risk is about the synchronization of when to get EACs and when to deliver an EAC, in order to ensure fulfilment of contract obligations.

It is therefore critical to get a single overview in order to manage the position and be able to see an accurate inventory balance for the current and forward period. This overview will include what will expire, i.e. a forward position of production, trades, retail sales consumption, and what has been redeemed/cancelled (realized inventory of production and retail sales). In essence, a system should be able to produce a physical inventory and a financial inventory. A physical inventory is based on demand / load forecast. The financial inventory trails this and therefore there might be a mismatch due to the timing of cancellation/redeeming that may leave existing liabilities. That subsequently will affect the risk and financial reporting. Additionally, the inventory management functionality accommodates optimization of how EACs will be allocated to fulfill contract obligations. This could be Trade-to-Trade matching against various attributes (technology, location etc), Peer-to-Peer matching of power deals (B2B and aggregated B2C) with desired set of certificates(s).

In the course of fulfilling contract obligations, other risks come around the corner that introduce exposures in growing EAC trading activities. For example, the potential that a counterparty will fail to meet its obligations, thereby creating a negative impact on future cash-flow. This risk is also known as “Unrealized P&L“ and represents the actual Mark-to-Market, which is the difference between the actual market price and the deal price. Risks associated with credit exposure have never been higher and are mostly associated with the daily management of credit impacts such as credit limit availability, scoring, receivables and potential future exposures. Without a centralized single aggregated view of credit exposure, it is difficult to manage and discern real exposure while seeking trading opportunities with counterparties.

Hitachi Energy is uniquely positioned with its RECTracker software application, which automates the end-to-end EAC, such as RECs and GOOs, tracking and management of processes from generation to assignment and retirement or expiration. RECTracker provides robust functionality for inventory planning and management:

• Captures EAC trades (manual and via imports)
• Manages EACs (import account status from registries) including  counterparties and contracts
• Performs position reporting and matching (by using inventory across several positions)
• Manages price curves
• Manages client margin calls
• Calculates Mark-to-Market, FX exposure reporting, and settlement and invoicing.

Each EAC will be tied to a renewable asset thus technology, fuel, expiration date can be derived. A hierarchical book structure is supported to capture comprehensive assets, purchase and sale trades. RECTracker offers a flexible book structure that allows segregation of domestic EACs from foreign EACs. In the case of trading EUAs, RECTracker supports regulatory reporting under MiFID2.

Due to the continued growth of the renewable energy market, the increasing volumes of EAC cancellations and customer demands are rapidly outgrowing the current utility of spreadsheet-based systems, reliance on the portal with access to the registry of the certification entity and the limitations of functionality included in traditional ETRM systems. Managing this Operational Risk will help mitigate the other risks associated with trading EACs such as REC/GOOs. Built-for-purpose, RECTracker can help you with that. Time to ‘renew’ your system?

Learn more about energy trading and risk management (ETRM) from Hitachi Energy.