The elcertificate market is a market-based support scheme for renewable generation in Norway and Sweden.
The market
Accredited generation assets receive one elcertificate for each MWh generated. Demand for these certificates is created by a legal obligation placed on electricity suppliers and obligated consumers to obtain certificates sufficient to cover a given share of the power that they sell or use respectively.
In this way, renewable generators receive an income from the sale of elcertificates in addition to the power price. Power suppliers add the cost of these certificates to their customers’ electricity bills. In practice, therefore, it is end-users that finance the scheme.
The development of the elcertificate market depends on both the consumption of those consumers obligated to purchase elcertificates and development of power generation capacity entitled to elcertificates. In recent years, the rapid construction of accredited generation capacity, especially wind power, in both Norway and Sweden, has resulted in the build-up of large surplus of elcertificates. At the same time, the tightening EU carbon market is expected to lead to higher CO2 and power prices in future. Both have contributed to collapse in the elcertificate price, with little chance that the price will recover.
The current low prices are primarily a challenge for those who invested in wind power a few years ago when the technology was more expensive and the prospects of elcertificate revenues brighter. With the sharp fall in costs that we have seen, especially for wind power, we continue to see investment in new generation projects despite the low elcertificate price. This suggests that investors expect the projects to return a profit based on power market revenues alone.
Regulatory framework
Norwegian projects with commissioning dates after 2020 will not be entitled to certificates. Projects that commission before this cut-off will receive certificates covering their production for 15 years.
In Sweden, there remains some uncertainty as to how the elcertificate scheme will be closed. The Swedish regulator, the Swedish Energy Agency, has proposed that all investments made before 2030 will be eligible. This will result in a significant oversupply of certificates and correspondingly low prices. However, various actors have proposed alternative stop rules for the elcertificate market which, if adopted, could result in higher prices. The Swedish authorities are expected to adopt a specific policy regarding the scheme’s closure this year. The decision will also impact Norwegian generators in receipt of certificates.
Market analysis and price forecasts
THEMA analyses developments in the elcertificate market and offers both price forecasts and tailor-made analyses of market developments. Our analysis is based on the use of our proprietary elcertificate model. The model is used in a wide range of projects from price forecasts and regulatory analysis to due diligence projects and investment analyses. It is also constantly updated, maintained and improved. The model combines a fundamentals approach to investment analysis with an option-based approach for certificate pricing. An option-based approach is used as part of the certificate prices calculations because this allows us to account for the uncertainty regarding the future volume of accredited renewable generation and the resultant risk that there is a shortage of elcertificates.
