Insight Conversation: Toby Ferenczi, founder, EnergyTag

Toby Ferenczi is founder of the EnergyTag Initiative, an independent, non-profit, industry-led initiative to define and build a market for hourly electricity certificates that enables energy users to verify the source of their electricity and carbon emissions in real-time. EnergyTag's founding advisory board members include large European renewable producers such as Engie, Vattenfall and Iberdrola, as well as consumers, grid operators, and key organizations in the energy certificates market. Ferenczi talked to Raymond Shi about the underlying principles of the initiative, the benefits of moving towards increased granularity, and the first EnergyTag demonstrator projects.

Could you explain what the EnergyTag Initiative is and how the concept originated?

The driver for the EnergyTag initiative is a global trend towards increased demand for renewable energy coming from consumers and businesses. More consumers are expressing a desire to buy renewable energy but question how to really buy renewable energy when all power plants are connected to the same electricity network.

Today, we use a system of Energy Attribute Certificates (EACs) that serves as a very important accounting mechanism. It is essentially a system that tracks every unit of [renewable] energy that is generated through a certificate and is structured in such a way to prevent double counting. The certificate then enables you to accredit the environmental attributes of energy to a consumer.

Having recognized the important of these certificates you also realize there is a flaw in the way they are used today. They rely on annual matching which means you match your annual consumption to certificates that were produced within the same 12-month period, and that enables you to claim that you are 100% renewable.

That system worked very well when certificates were introduced 20 years ago. As there were no renewables on the grid, you were always displacing fossil fuels, so the timing wasn't so important. But today timing is everything. For example, once you have more than 30% of renewables on the grid you have times of the day when you have massive overproduction of renewables and other times when you lack renewables and rely on fossil fuels. That temporal aspect is lost in today's certification system. It does not reflect the real-world availability of renewable energy, so that is why we have developed the initiative.

We set up the EnergyTag initiative last year to address this and are working alongside leading industry organizations to define the first standard for hourly energy certificates and set market guideline for issuing and trading certificates. These are to work within the same principles as current EAC system with the key difference of an additional timestamp, so you know not just where the electricity is produced but when it was produced as well.

In parallel, the initiative will stimulate the first voluntary markets by curating a series of demonstrator projects spanning across six different countries and will showcase existing technologies for real-time renewable energy tracking.

What are the benefits of increasing the granularity of certificates?

One of the key benefits is improving the perceptions around renewable energy claims by linking production to consumption in real time and making the certificate system much more reflective of the physics and economics of the grid.

A second aspect is providing a new market signal for energy storage and demand response. The design allows these certificates to be priced differently throughout the day depending on the time and corresponding supply and demand of renewables.

The price should be zero or very small when there are lots of renewables available and it should be more expensive during periods when less renewable generation is available. The difference between the two is the price signal that energy storage technologies could use, such that they would be able to buy these certificates when they are cheap, store the energy and corresponding certificates and put them back onto the market when there is less renewables available.

A third benefit is that it could support a new carbon accounting methodology. There are more people revisiting the topic of carbon accounting because people use these certificates for their Scope 2 carbon emissions reporting. More granular EACs would provide a new method to drive more impact and to empower the right behaviors that maximize carbon savings.

Why would hourly certificates send a different price signal to existing Guarantees of Origin?

If we consider why Guarantees of Origin (GOs) are so cheap today relative to power, a key reason is because they are very easy to use, because you can generate them in the summer and use them in the winter so there is an abundance in supply. If you consider the existing system of annual matching, you can claim to use solar energy at nighttime because there is no verification mechanism that tells you where your power is from on a granular basis.

A more granular system makes certificates slightly harder to use because you can only claim a certificate if you show you are consuming at the same time. What that will mean is that there will be some hours where the certificates will cost close to nothing because of an abundance of renewables, while other times of renewable shortfall they should be significantly more expensive and that is the price signal you want to send.

The price will be for the market to decide but I think that these hourly certificates will send a much more accurate and useful price signal to the market that will help drive decarbonization.

Is there a specific price target you see for Guarantees of Origin?

If you look at the price of current GOs it is difficult to predict where it will end up. Demand is going up but so is supply because there are a lot of renewables being built. For granular certificates it is very hard to forecast because markets are only just being established.

I would expect a different pricing regime compared to current GOs because they will be zero at certain times of the day and non-zero at other times. There would be some correlation with the power market because wholesale power prices are driven to some degree by availability of renewables.

For example, the famous duck curve shows that when you have a lot of solar during the middle of the day, power prices are pushed down for those hours. Thus, you would expect the price of these hourly certificates to be correlated to the power price and provide another price signal on top of that.

With some correlation to power markets, do you see a relationship between GOs and carbon prices?

With respect to EU Allowances, the big difference is that hourly certificates are all about consumption-attributional accounting whereas carbon credits are a mandatory tax on production of CO2 at the source.

I think there will be some correlation between the two markets over time. What we are currently seeing is that the carbon price is pushing up power prices. As it lifts the cost of marginal generation it is raising power prices for everyone and even pushing up the price of PPAs.

Even people buying renewable energy and GOs are still impacted by the cost of carbon when intuitively you would think they would be more insulated because they are consuming electricity from carbon free sources.

With normal GOs it is more difficult to determine the correlation with the power market because of annual matching.

If you moved to these hourly certificates, they would certainly be much more closely correlated with power markets. The intention is to make the certificate market much more reflective of the real-world availability of renewables.

The certificate market was established to promote investment in renewable technologies. Is the aim of hourly certificates also to facilitate renewable investment?

I think when corporates decide their renewables procurement strategy they are focused on additionality. They want to know when I purchase renewables, I am creating a positive impact by ensuring a new renewable [wind/solar] installation is built.

It is actually very hard to show this even if you sign a Power Purchase Agreement due to issues like price cannibalization but that is what people are looking to prove.

We are suggesting that it is not just about new renewables but there is a wider infrastructure needed to switch to clean energy. The question should be "how can we consume more when renewables are abundant, and less when they are not?"

The more appropriate solution to maximizing the carbon impact may be greater storage and flexibility. We want to maximize carbon mitigation and accelerate the transition to 100% renewable energy.

I like to use the phrase "carbon cannibalization"—if you have a grid that already has a lot of solar, putting in more solar produces more renewable energy at a time of day where the carbon intensity of the grid is already very low.

The greatest carbon impact may come from installing a battery that can store solar energy during the day so that it can be used in the night when you would be running a greater proportion of fossil fuels.

Granular hourly certificates help you capture this temporal dynamic.

Do you think the primary mechanism is the price signaling from certificates? What are the other factors to consider?

I think the primary drivers are a combination of the price signal and greater transparency.

That increased transparency is going to underpin the demand for certificates which then sends the price signal to the supply side. On the supply side, people should respond by building more renewables at the right time of day and prioritize energy storage technologies.

In terms of demand response, they already respond to price signals coming from the power market as well as shorter time signals from grid operators such as frequency response. This would provide another price signal for demand response aggregators and that could lead to shift in people's load and corresponding consumption profiles.

Is there a role for hourly certificates in hydrogen development, by differentiating between different types of hydrogen?

Hourly certificates would facilitate the development of green hydrogen, specifically the labelling of green hydrogen. Green hydrogen refers to hydrogen that was produced using electrolysis powered by renewable electricity.

Hydrogen is already widely used for many industrial processes, however most hydrogen is produced using coal. Coal gasification is very carbon intensive so if you can replace coal with renewable electricity there can potentially be a big benefit.

If you want to buy green hydrogen as opposed to grey or blue which come from less clean sources, you need a certification system to verify that hydrogen was produced using green electricity.

Hydrogen can act as a storage medium on the grid only if you are able to correlate the time of [renewable] production with consumption. You do not want hydrogen electrolysis to occur at peak times of demand on the electricity grid, instead you want production at periods of high renewables and low demand.

Do you see the use of hourly certificates leading to more local consumption of GOs?

This is a broader fundamental question about the GO market—over what distance you should be able to trade these certificates.

Currently in Europe you can trade them through any member state in the AIB which includes Iceland which has no interconnector. There is no physical flow of electricity between Iceland and the rest of Europe, but you can claim GOs.

What we are doing is adding a timestamp that makes the certificate market more reflective of the physical flows of electricity on the grid. Whether the system should limit trading of certificates to physical flows on the grid is an interesting debate that is discussed regularly but would ultimately be for the European Commission to decide.

There is an interesting angle within local flexibility markets which is emerging to solve problems with local grid congestions, and you can imagine using these hourly certificates as an important instrument in those markets.

How has the implementation process of the initiative been so far?

We have six demonstrator projects that are launching now, and these will be up and running by the end of the year , so that the market is starting from now. We have a further four projects which are expected to start later this year.

It is difficult to predict the volumes of these certificates, volumes will begin quite small at the end of this year and gradually increase through next year into the following year. The pace will be ultimately dictated by demand from the market.

What challenges do you see for EnergyTag in 2021?

There are a few challenges to the process. A lot of technology platforms are already out there that have this capability so there aren't necessarily too many technical hurdles. However, getting access to granular hourly meter data is always a challenge, but there is already a lot of progress in Europe to centralize TSO data.

Making sure to link the system with the existing certificate schemes is another challenge. This is something that we spend a lot of time thinking about, and there are several solutions that have been presented here. We plan to publish another report at the end of the year which will have a more detailed set of guidelines based on learnings and feedback that we are getting from these demonstrator projects.

It is an iterative process—the guideline for the current GO framework also changed regularly.

How would you define success for EnergyTag—would this be integration into the existing GO framework?

Success for us would be for the guidelines we have developed to be adopted by the European Commission, the AIB in Europe or other REC systems internationally.

EnergyTag is an industry initiative meant to accelerate the development of the market. We are trying to focus on adding a timestamp to existing certificates to facilitate this market to emerge, whilst providing a respected forum for discussion.

Environmental markets start off as voluntary markets and then become regulated. Even GOs in Europe which are now part of European legislation started off as a group of companies that got together and developed a mechanism to enable people to buy renewable energy.