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European renewables certificates reach all-time high as drought crimps supply

Highlights

Nordic hydro 2022 EuGOs assessed at Eur4/MWh

Market expects lower prices from 2023 onward

  • Author
  • Vittoria Morini    Nicholas Baldwin
  • Editor
  • Alisdair Bowles
  • Commodity
  • Electric Power Energy Transition Natural Gas

European guarantees of origin (EuGOs) for 2022 hit a new record high Sept. 1, with the most actively traded hydro certificates reaching Eur4/MWh as very dry weather conditions curbed supply of hydro power while demand for all renewables remains strong.

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Platts assessed the Nordic Hydro 2022 GO at Eur4.00/MWh on Sept. 1, the highest price in records dating back to 2019, S&P Global Commodity Insights data showed. That represents an increase of more than 130% from just under Eur1.72/MWh on Jan. 4.

One trader said some Nordic Hydro 2022 certificates had sold as high as Eur4.10/MWh, although no deals at this level were confirmed.

Certificates for other technologies were not far behind, with EU Wind and Solar closing in on the Eur4/MWh mark too, assessed at Eur3.75/MWh on Sept. 1, S&P Global data shows.

The lack of hydro production in Europe due to drought conditions was the main supply factor driving the increase, sources said.

This summer large parts of Europe have experienced historic drought conditions, while Scandinavian countries, anticipating low water supply, have prioritized the filling of reservoirs at the expense of the production of electricity dedicated to export.

Nordic countries are the main GO sellers thanks to their extensive hydro production, and consequently available volumes of hydro certificates have been limited this year.

"We are not able to offer any Hydro," said a GO trader.

A second trader was of a similar view: "There is a bit of a shortage everywhere currently."

At the same time, demand has been supported by extremely tight gas and power markets, according to traders.

There "simply won't be enough gas in Europe this winter, which might be driving suppliers to seek alternative energy," a third trader said.

Also contributing to the increasing demand is the growing number of companies committing to greater use of renewable energy through initiatives such as the RE100 Climate Group -- a commitment among big businesses to 100% renewable energy.

Market expects weaker 2023

Despite that demand, high prices may not be around for long with certificates for 2023 production trading lower -- a market structure known as backwardation.

GO prices tend to be higher for future contracts, but the situation reversed over the last few weeks and Nordic Hydro 2023 and 2024 were last assessed at Eur3.89/MWh and Eur3.12/MWh, respectively.

Market players cited two main drivers. First, the drought that Europe has been experiencing over the last couple of months is mainly weighing on the production of 2022 electricity. Producers are buying GOs to cover their forward sales, while customers are accelerating their supply at the same time.

Second, the UK confirmed it will no longer allow the import of EuGOs from 2023. Market participants have said that nearly 70 TWh will be withdrawn from the market from April 2023 -- a sizeable drop in demand.