Emissions reporting with Energy Attribute Certificates

With the introduction of a series of news laws relating to mandatory disclosures of operations, investments and marketing claims, the EU Commission intends to fundamentally alter the nature of the European Single Market.

The principle of an “even playing field” has for decades granted companies access to the European market on equal terms for quality, price and state aid.

With a new set of legislation, the Commission has added a new dimension to the market. Both financial markets and green-minded consumers will now be able to use sustainability performance as a factor.

Three laws in particular provide the foundation for this new dimension. The Sustainable Investment Taxonomy provides financial market actors and large undertakings with a set of criteria for how economic activities can be sustainable.

It requires that they report on the percentages of their Capex, Opex and turnover invested in, going to, or coming from sustainable activities.

The Green Claims Directive will set stringent rules for how companies can communicate about their products’ environmental performance. Any so-called “green claims” will need to be precise, scientifically verifiable and relevant for the product as a whole.

Finally, the Corporate Sustainability Reporting Directive (CSRD) sets out a series of concrete, double materiality reporting obligations on five environmental standards for more than 50,000 European companies.

Together, these European laws cover the three key aspects of bringing transparency on sustainability matters to the market along with some others, such as the soon to be adopted Corporate Sustainability Due Diligence Directive.

The Green Claims Directive ensures that consumers will be well informed about the sustainability impacts of the goods and services they choose to purchase.

The Taxonomy also provides investors with clear information – and their own reporting obligations – about how they can invest in companies with sustainable business models and practices.

Both require access to knowledge and information that have not typically been accessible in the European market. This is why the CSRD, through the painstakingly precise European Sustainability Reporting Standards (ESRS) - requires that European companies provide detailed information about their own impacts, risks and opportunities within climate, biodiversity, use of marine resources, circular economy and pollution prevention.

The ESRS are not only very detailed and ambitious sustainability reporting standards; they also work as the foundations providing the information necessary to disclose under the Taxonomy and Green Claims Directive.

Climate change impact and risk lies at the core of the ESRS, and any company not reporting on it needs to justify why they have no impact, risk or opportunity related to climate change mitigation or adaptation While the key questions of the chapter revolve around total gross GHG emissions and the existence of a climate transition plan in line with the Paris-agreement, energy consumption is also treated in detail.

Those already using market-based reporting will be happy to see two core principles adopted in the standards.

First, gross GHG emissions shall be reported using both the location-based and the market-based method.

Second, all scope 2 energy consumption, i.e., purchased electricity and heat, shall be reported using only market instruments.

Here, Guarantees of Origin (GOs) and other Energy Attribute Certificates (EACs) like Renewable Energy Certificates (RECs) are specifically mentioned as market instruments that can be used. This means that while companies should report their scope 2 emissions, both market- and location-based, the mandatory disclosure of energy consumption must be market-based.

Because the ESRS also require both up- and downstream scope 3 reporting, this has a cascading effect where companies can use the market-based emissions reporting for their suppliers’ scope 2 emissions.

It also shows that the EU has landed firmly in favour of utilising GOs as an instrument to track the ownership of renewable energy.

The market seems to have already anticipated the upcoming changes. Since summer, the spread between CAL 2022, CAL 2023 and the future vintages has remained significant.

Considering the fundamentals, this has surprised everyone in the market.

While the issuances of the AIB GOs are at an all-time high, making the market long, they are expected to grow larger again in 2024.

Nevertheless, this expected increase in supply seems to leave the futures prices unaffected. The graph below shows how the price spread between 2023 (white line) and 2024 (orange line) has developed this year:

The general consensus among market participants seems to be that the spread results largely from hedging activities.

It would appear that the market is anticipating the price of GOs to rise in the coming years, as other futures contracts also follow along the trend line of CAL 2024.

While there are other variables contributing to the risk awareness of buyers, we can assume the changing regulation is one of the key factors in price developments.

Scopes 1 and 3 are less clear. While there has been a practice in the market of cancelling EACs on behalf of suppliers’ energy consumption, it is not transparent to what extent the ESRS are open to this approach.

There is certainly no language to ban it, however, it is also not explicitly allowed. Scope 1 has an option to use Guarantees of Origin for biomethane in energy consumption reporting. This is tied to the EU ETS reporting methodology, which is less harmonised among member countries than one would wish.

However, certain member countries do allow for the bundled cancellation of GOs along with a mass balance system and third-party sustainability verification to prove biomethane consumption.

This indicates that the ESRS would accept similar proofs, but the final decision might be left to the member state responsible for ensuring that companies report correctly.

A last piece of good news lies in the clear acceptance of non-European EACs in scope 2 reporting. Given the cascading effects of scope 3 reporting requirements, any company with reporting obligations must also report on their extra-European scope 3.

For their suppliers, the same requirements would apply as for European suppliers, and EACs are one of the instruments they can use to prove renewable energy consumption in scope 2.

Therefore, not only will the ESRS increase demand for GOs; they will do so for EACs in any market with a significant export to Europe.

Based on the strong position granted to EACs for electricity in the ESRS, we would also expect to see clear and increased market interest in sourcing GOs.

The natural result of this development is seeing new market actors enter the space. Corporate actors will now be forced to learn about GOs. Many of them will also now have to enter the market.

The challenge, naturally, is the knowledge. The opaque nature of GO and EAC markets raises the barrier to entry. This missing market transparency makes it extremely difficult to budget for the upcoming regulatory changes, as there are few available price sources in this highly Over the Counter (OTC) market.

When we look at how the prices of AIB hydropower futures contracts have developed, we observe very minimal spreads between CAL 2024 (white), CAL 2025 (red) and CAL 2026 (orange). Whilst several factors affect the prices, this at least further signals the alignment of hedging activities in years to come. Naturally, the prices of future contracts also reflect the market expectations of price level development.

As changing regulations look certain to increase demand for Guarantees of Origin and other Energy Attribute Certificates in the coming years, we can also expect to see increased volatility in the markets.

Some wild cards, like the European Commission evaluation of the supply and demand of the GO markets in 2025, still remain and make it difficult to forecast long term price development.

It is nevertheless possible that prices will rise in the coming years, especially for GOs sourced from new renewable energy sources.

Nevertheless, the new regulatory framework does not treat all the GOs the same, and we are highly likely to see differently set up tradable products in the coming years.