The following article looks at Guarantee of Origin - the current European certification mechanism for renewable energy -, analysing its current strengths and limitations. Why is time so important when dealing with electricity? Can blockchain technology be an enabler to create better support tools to track and certify an ever-growing volume of (distributed) Renewable Energy?
Led by large tech and consumer goods companies, consumers’ demand for renewable energy is constantly rising (source). In 2018, only in the US, more than 6GW of renewable energy capacity has been contracted by corporations, a 5 times volume increase compared to 2014 (source). These market trends are generating new debates on what it actually means to purchase green energy and on the mechanisms that are supposed to certify it.
Currently, in Europe, in order to document and report that the energy sold and consumed comes from renewable energy sources, companies (and individuals) must rely on Guarantees of Origin (GO). The Guarantee of Origin is the official tracking certificate regulated in the European Directive 2009/28/EC, article 15 and provisioned in article 19 of the Clean Energy Package (CEP), which, if enters into force, it will make GO the only acceptable instrument with which suppliers can prove that they supply electricity from RES.
Therefore, the question arises naturally: are GOs the best and most efficient solutions for Europe to track and certify an ever-growing volume of (distributed) Renewable Energy? In order to answer this question, let’s take a look at three critical areas for GO: user experience, proof-of-additionality and market operations.
1. User Experience
GoOs were designed as an additional incentive scheme for renewable energy, but also as a transparency mechanism for consumers. The CEP recognizes that the GO should be a valuable instrument for Europe’s electricity consumers. Corporate consumers use them to report and prove their increasing commitments towards sustainability targets, while individuals should have the ability to check any time they want.
However, is this really the case? How many consumers know what it means to buy green energy? And the ones that know, how can they check?
Let’s see what Maria - a consumer in my country of residence, Spain - would have to do. After some research (a.k.a. Googling “Garantias de Origen España”), Maria would probably find this webpage from the Spanish Issuing Body (IB), CNMC. Once there, Maria would have to know (somehow) that she has to click on “Trámites según tipo - Redenciones por CUPS” (Claims for consumption points), input her CUP (that she would have to find on her bill) and the result would be this Excel (or PDF) documentation.
I can see Maria wondering: “What does it mean? Was this my entire consumption? For what period? How do I know that this proves I bought green energy? Where was the energy produced?”
And what if Maria was a sustainability manager of consumer goods company? She has a tradable string of text that confirms a few times a year that an amount of renewable energy was generated somewhere at some point. How can she use this information to prove to end-consumers, investors and other stakeholders that a corporate’s energy consumption is truly carbon-free every day and in every facility?
2. Proof of additionality
Maria’s confusion, however, is not the worst problem. In fact, GOs have one major flaw: they are completely decoupled from time and physical power delivery. This is ok to provide the origin of food and rare materials, but not for electricity. In fact, even though the price of batteries is decreasing, there is currently no cost-effective solution to store large amounts of electricity at scale. This means that all the electricity that is consumed must be generated exactly at the same time.
However, the validity of GOs is 1 year and they can be used anytime before they expire. In practice this means that - for example - in a windless winter night (very low volumes of renewable energy because water levels in dams are low, turbines stand still and solar is not generating), Energy Retailers can still claim to be sourcing green electricity thanks to surplus certificates which they got during peaks of renewable generation. In reality, the electricity on this windless winter night is being generated by fossil fuels.
The problem with ignoring time, is that consumers are not educated or incentivized to shift consumption to periods with high availability of renewable energy, which is the only way to achieve a 100% green consumption. In fact, since the certificate is valid all year, prices do not follow supply (e.g. in summer there is always a much higher share of renewable energy). Buying green electricity certificates in winter should be more expensive than summer, or at midnight than midday, but there are no price signals that reflect this. For this reason, GoOs cannot be considered as an effective proof of additionality.
3. Market Operations
GOs are described as an electronic document and every step of a GO lifecycle (creation, transfer, trade and cancellation) is recorded on an electronic platform managed by IBs and AIB (ref). Nevertheless, GOs are an extremely burdensome process that requires each stakeholder to manually input data from their own database into an electronic platform (or an Excel spreadsheet like in Spain) at every step of the lifecycle. The current GO value chain is spread across multiple (very different) parties as shown in the image below, making the auditing process slow and expensive, multiple disputes easily arise and corrections of mistakes extremely burdensome.
Due to the high overheads and the system design, GOs don’t include:
- Storage, making it impossible to prove that a battery (or an electric vehicle) is (dis)charging green energy
- Distributed generation such as small-scale photovoltaics
- kWh-granularity to be able to provide more accurate data to our friend Maria
All in all, the answer to our initial question seems to be:
“No, current GO mechanism is not the best and most efficient solution for Europe to track and certify an ever-growing volume of (distributed) Renewable Energy”.
But is this really the conclusion? Not exactly…
In fact, even though GO is the only acceptable certification instrument, there is no specification whatsoever in the legislation about what kind of technology needs to be used to administer the GOs.
So here it’s where the opportunity lies.
What if we could have a technology that enables the timestamping and transfer of digital goods based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party?
This description must have reminded something to the most navigated blockchainers… It’s Satoshi Nakamoto’s definition of Bitcoin in his/her/their white paper.
This is the reason why certification is the natural first step for blockchain in the energy sector: it is the use case that resembles the most its most well-known implementation - Bitcoin. Let’s add smart contracts to the equation and we have the solution to the problems.
Units of electricity become digital goods/assets (tokenization of energy) which allows automatic certificate generation (timestamping), transfers and ownership tracking with unprecedented transparency, integrity, and detail because it is based on cryptographic proof and not employees reviewing spreadsheets.
By no means blockchain-based certification is supposed to replace current certification systems (where they already exist), but it would rather add the most value as IT back-end system for Issuing Bodies. Relying on a blockchain-based back-end would allow GoOs (and all the other EACs mechanisms) to automate and capture all the end-to-end process in one ledger, making the entire lifetime of the certificates from several months to few seconds. Additionally, allowing all the parties to work on the same data would result into drastic cost reductions, by avoiding any kind of settlement process and by automating the auditing of double-counting, false claims and human errors. Finally, it would streamline trading by eliminating the need for brokers and portfolio management companies thanks to smart contracts, which would already include a set of programmed rules automating the assignation and cancellation of certificates.
The creation of such a system obviously poses many challenges, starting from how to securely provide trusted metering data to the blockchain and how to invalidate it in case it is wrong or frauded.
However, it would enable increased transparency for the consumer, kWh granularity, the integration of storage and distributed generation and - most importantly - hourly-bundled certificates with price fluctuations following renewable energy supply.
All of this while reducing overhead costs and increasing the trust of the system (certificates generation, validation and cancellation is based on cryptographic proof and not employees reviewing spreadsheets)!
Let’s not forget that it would also create the basis to spur innovation in the retail market such as Local Energy Communities and Aggregators buying and selling the energy produced locally through small-size-PPAs or Peer to Peer energy trading.
The future of GoO (and other green certification mechanisms) must be coupled with time and include distributed generation. Blockchain is the enabler technology to achieve it.
FlexiDAO S.E.S. s.l. is a cleantech start-up company based in Spain, which develops software solutions to help energy companies to improve and automate how they manage, control and optimize both data and electricity flows.
FlexiDAO’s product Spring is already in market, helping Energy Retailers track the origin of their renewable energy based on time and location through a white-label application. The software uniquely matches renewable generation with consumption based on a set of rules. This is currently used as a marketing tool for their corporate consumers, who require this service to fulfill their Corporate Social Responsibility needs. Adding time and geographic proximity to the Retailer’s commercial offer allows them to provide consumers with greater proof of RE additionality to back their sustainability claims. Therefore, Spring acts as a transparency layer that works additionally to the current EACs mechanisms for greater granularity. FlexiDAO’s mission is to apply Spring as IT back-end system for GO Issuing Bodies and all the other EACs mechanisms.