Both subsidy-free and state-subsidized electricity production with renewable energy now has the option of being issued guarantees of origin. This means that even biomass plants that have received state support are also issued guarantees of origin, which can be sold on to companies that want to buy green electricity.

However, it helps to distort the Danish energy market and in practice, electrification is delayed by the fact that biomass plants both receive state support and also receive additional financial gains by selling guarantees of origin.

In this note, we have analysed the expected effects of phasing out the issuance of renewable electricity from biomass plants commissioned with state support outside a tender procedure. The central estimate is that the existing practice reduced the demand for new green electricity by approximately DKK 3 billion in 2023 (corresponding to the sum of the spot price of DKK 626/MWh and the price of guarantees of origin of DKK 35/MWh multiplied by the cancelled guarantees of origin of 14,1 million MWh).

The demand for guarantees of origin from existing state-subsidized electricity production with biomass firing does not support or encourage new investments in solar and wind energy, as the customer's electricity consumption continues to be traded on the spot market.

In practice, we can see that demand has been redirected from new renewable electricity production commissioned via Power Purchasing Agreements (the so-called PPAs) to guarantees of origin from existing state-subsidized renewable electricity production. This weakens investments in Danish renewable energy projects accordingly.

Administratively, it is clearly easier for companies that want to buy green electricity to purchase guarantees of origin, corresponding to the company's electricity consumption, instead of having to enter into a PPA, which typically extends over 5, 7 or 10 years.

It is important to ensure additionality

The issuance of guarantees of origin for electricity production from renewable energy has generally served two purposes. Firstly, they are used to document the origin of a given amount of energy (one MWh) based on renewable energy production, and secondly, they allow electricity consumers to contribute to promoting the use of renewable energy by demanding additional renewable energy production.

The European Commission has previously highlighted that a well-functioning market for guarantees of origin can assist Member States in developing their renewable energy sources in the most cost-effective way. In order to ensure a high degree of additionality, the European Commission therefore highlighted in connection with the revision of the Renewable Energy Directive in 2018 that “under the proposal, guarantees of origin should no longer be issued to producers whose energy production also receives support”.

However, this issue was left to national implementation. Some member states, such as Germany, have failed to issue guarantees of origin for state-supported and older renewable energy plants without any claim. This is a contributing factor to the strong growth in sales of PPAs in Germany. In 2023, the number of PPAs more than tripled (an increase of 323 points compared to 2022), and the German Energy Agency believes that PPAs play a key role in the development of the future green electricity market and competitive growth for renewable energy. In Denmark, on the other hand, guarantees of origin are still issued to state-subsidized biomass plants, and this distorts the market.

A lost green potential

What are the economic consequences of the Danish practice, and what does it mean for the deployment of new additional renewable energy? We have calculated the potential losses.

according to Association of Issuing Bodies In 2023, 14,1 million guarantees of origin were cancelled in Denmark. In the same year, the average spot price was DKK 626/MWh and market data indicates that guarantees of origin were sold for approximately DKK 35/MWh.

Assuming that the issuance of guarantees of origin had been made in continuation of the conclusion of a PPA at the same price level as the spot market, this market would have had a potential value of as much as DKK 9,3 billion in 2023.

Since the majority of guarantees of origin are issued to state-supported and existing renewable energy plants, this calculation simply represents the potential value that the PPA market could have had in 2023. The value of the Danish PPA market is, as shown, significantly lower, as it is administratively easier to simply purchase guarantees of origin from existing renewable energy plants, such as biomass plants, than to enter into a new PPA.

According to the Climate Projection 2024, biomass plants produced 7,26 TWh of electricity in 2023, which corresponds to an average value of just over DKK 4,5 billion on the spot market. If the estimated value from the guarantees of origin of DKK 35/MWh multiplied by 7,26 million MWh is added, the value increases to DKK 4,8 billion.

Electricity production from biomass combustion can receive support from two support schemes: A support scheme for electricity production from non-depreciated plants and a support scheme for electricity production from depreciated plants. It is noted that these are non-bidding-based support schemes and that no overcompensation assessments have yet been made.

As mentioned, the EU Commission recommends that guarantees of origin should not be issued to energy producers who also receive state aid. Against this background, it may be relevant to assess to what extent the demand for electricity on the Danish PPA market is hampered by the issuance of guarantees of origin for electricity production based on biomass. Since it is administratively more demanding to enter into a PPA than simply purchasing electricity on the spot market and subsequently purchasing guarantees of origin from state-subsidized renewable energy production, it must be assumed that the current demand for guarantees of origin from biomass-based electricity production cannot be fully converted into a correspondingly increased demand on the PPA market. In table 1 A conversion factor of less than 100 percent has therefore been assumed.

The table assumes annual biomass-based electricity production and PPA and spot prices similar to what was observed in 2023. The figures in the first column of the table exclude the value of the guarantees of origin that may be issued as a result of the increased electricity production in the PPA market. This value is given in the second column of the table.

Note: The market for guarantees of origin is a European market, which means that cross-border trading is possible. It should be noted that significantly more guarantees of origin are currently issued in Denmark than are cancelled, indicating that it is unlikely that Danish operators will overall import biomass-based guarantees of origin if the issuance of guarantees of origin to Danish biomass plants is phased out.

In the central estimate (medium conversion factor), the effective market pull for new green electricity, and the resulting renewable energy investments, is expected to be reduced by approximately DKK 3 billion, and with a very conservative assumption of a conversion factor of only 50 percent, the dampening effect on the PPA market is estimated to be approximately DKK 2,3 billion.

A conservative estimate is that phasing out the current practice, where biomass plants that receive or have received state support also receive guarantees of origin, will increase demand for new renewable electricity production, corresponding to a value of at least DKK 2-3 billion in 2023 at the market prices and biomass-based electricity production that were applicable in 2023. That is, the direct effect minus the value of the guarantees of origin.

Nasdaq forward prices indicate falling spot prices in the coming years, which implies a corresponding decreasing effect of phasing out the issuance of guarantees of origin to biomass plants.

The current practice, where companies can purchase guarantees of origin from state-supported renewable electricity production, risks undermining climate goals as it significantly inhibits investments in new clean renewable energy.

Economic research in the field

There is broad agreement in the academic literature that issuing guarantees of origin for older renewable energy plants that have also received state support does not contribute to the deployment of new renewable energy generation. The research literature emphasizes the absence of additionality in issuing state-supported guarantees of origin and mentions the risk that the economics of new renewable energy projects will be undermined.

Hamburger et al. (2019) point out, for example, that “the consensus in the literature is that green electricity products based on guarantees of origin do not provide an incentive to invest in new green electricity production”. And Paris, A. et al. (2024) highlight that “a solution to reduce the oversupply of guarantees of origin could be a general ban on issuing guarantees of origin for already state-subsidised renewable energy capacity, inspired by Germany’s approach”. In Germany, guarantees of origin from state-subsidised renewable electricity production are not issued to the beneficiary, but the guarantees of origin are immediately cancelled to ensure that German taxpayers are credited for their renewable energy contribution.

There are no research articles yet that quantify how significant the expected effect on renewable energy additionality may be.

Too many financial incentives

In Denmark, it is not only the issuance of guarantees of origin to state-subsidized biomass plants that distorts competition and harms the deployment of new solar and wind energy. On the contrary, both direct and indirect state support has helped to support plants that are unlikely to be viable from an operational and energy-economic perspective.

The extensive burning of wood biomass and other forms of biomass today constitutes over half of renewable energy in Denmark. A central reason for this is direct state support for biomass plants that produce electricity.

In the period from 2022-28, it is expected states to provide a total of DKK 4,6 billion in state support for burning biomass to produce electricity. In direct state support, over 3,5 times more will be given to biomass plants than to solar and wind energy in Denmark during the period.

In the last few years alone, biomass plants have received a total of DKK 1,2 billion in direct state support, and in 2023-24 they have also received a tax exemption worth DKK 2,2 billion, according to the tax economic statementIn addition, citizens have received a tax exemption for burning biomass worth approximately DKK 4,5 billion per year.

It delays the electrification of the heating sector in Denmark when biomass heating receives such large-scale direct and indirect state support. When biomass plants as well as biogas in Denmark receive significant state support in the billions, it is more difficult for other energy solutions to gain a foothold in the market. This applies to both heat pumps and solar and wind energy.

Solar and wind energy are already cheaper than fossil fuels as well as biomass burning in terms of lifetime costs, according to a number of analyses – including those from the renowned German Fraunhofer Institute. Solar panels and wind energy can do well on market terms, and for a number of years have delivered increasingly more energy at falling costs.

However, due to the extensive state support, they do not currently compete on fair and equal market conditions. Removing direct and indirect state support for biomass burning would, all other things being equal, increase the demand for clean renewable energy, such as solar and wind energy, which are significantly cheaper than biomass burning in terms of lifetime costs.

From a climate perspective, there is also much evidence to suggest that public funding should not be provided for wood biomass heating at all. The direct emissions from burning wood biomass are currently over 15 million tonnes of CO2 per year, og the time-weighted climate impact is approximately 4 million tons over time.

Since approximately 30 percent of Danish biomass consumption is imported, it does not burden the Danish CO2 accounts and thus hides its harmful climate impact. Denmark currently imports over 3,5 million tons of wood pellets and wood chips per year, thereby occupying large forest areas outside the country's borders. These trees could suck CO2 out of the atmosphere, or the biomass could be embedded in wood-based materials with higher added value than combustion.

Non-fiction

Wimmers, A. & Madlener, R. (2024): The European Market for Guarantees of Origin for Green Electricity: A Scenario-Based Evaluation of Trading under Uncertainty. Energy

Paris, A., Hechelmann, R.-H., & Buchenau, N. (2024): Exploring the effect of Guarantees of Origin on the decarbonization of corporate electricity procurement: A case study of Germany and Norway. Journal of Industrial Ecology

Bjørn, A., Lloyd, SM, Brander, M. et al. (2022): Renewable energy certificates threaten the integrity of corporate science-based targets. Night. Climate. Chang.

Danish Energy Agency (2019): Analysis of the Potential for Corporate Power Purchasing Agreements for Renewable Energy Production in Denmark

Hamburger, Ákos. (2019): Is guarantee of origin really an effective energy policy tool in Europe? A critical approach. Society and Economy.

Hamburger, Ákos & Harangozo, G. (2018): Factors Affecting the Evolution of Renewable Electricity Generating Capacities: A Panel Data Analysis of European Countries. International Journal of Energy Economics and Policy

International Renewable Energy Agency (2018): Corporate Sourcing of Renewables: Market and Industry Trends

Center for European Policy Studies (2018): Should all producers of renewable energy automatically receive GOs?