Feed-in tariffs and auctions have been effective support mechanisms to clean energy development in Denmark. However, continued government auctions could undermine the growth of the corporate PPA market and hamper progress in transforming the grid.
“Auctions have promoted the growth of renewables in Denmark. They have served their purpose well, but they are no longer needed for the green transition to succeed,” says Better Energy CEO Rasmus Lildholdt Kjær, and explains:
“We are entering the second phase in decarbonising our energy system – a market-driven, corporate-driven phase. Corporate power purchase agreements (PPAs) with additionality are now a critical tool in adding new renewables to the grid. Getting these right requires a clear understanding of a murky market. Companies can’t claim additionality when the plants behind the PPAs are subsidised. We need to mobilise corporate clean power demand in Denmark and find a way to recognise companies that add more renewable energy to the grid.”
Both companies and consumers are demanding more transparency and legitimacy when it comes to green energy sourcing and the many shades of green. Bold claims of climate action must be backed with real-world impact.
In 2019, Better Energy has announced almost 300 MW in Denmark to aid companies in green growth and the transition to a low-carbon economy, primarily driven by subsidy-free projects. Better Energy has taken a leading position in innovating PPA products for the renewable energy industry and has already delivered headline results for Google, Chr. Hansen, Bestseller and other high-profile clients. The solar plant in Næstved associated with the Google PPA is the first subsidy-free project in Denmark with full additionality.
Better Energy has plans to accelerate the shift towards green energy in Denmark by adding 7 GW within the coming 6-8 years.
If PPAs are to make a meaningful contribution to decarbonisation and realise their full potential, the following points need to be addressed.
Adding new capacity in Denmark
The fact that new solar plants get built and added to the grid in Denmark means that new capacity will count towards Denmark’s ambitious climate goals.
“More and more companies like Google, Chr. Hansen and Bestseller want to demonstrate their sustainability leadership by driving the construction of new renewable energy projects and accelerating the transition to a zero-carbon electricity grid. This effect is known as additionality – an important difference in Better Energy PPAs,” says Rasmus Lildholdt Kjær, and explains:
“By signing a PPA with us, companies can make a long-term commitment to add as much renewable energy to the grid as they will use. This solution adds new, renewable capacity to the grid and makes the Danish grid greener, accelerating the green transition in Denmark.”
Making renewable energy count
The physical power grid can be thought of as one big pool of energy. The electricity produced from both renewable and non-renewable sources gets mixed together in this pool. As a consumer, you cannot specify which electrons you get, but you can make sure that you add as much as you use. In addition, with Better Energy, you can make sure that your power purchase supports renewable energy projects directly. The electricity is added to the grid to increase the amount of green electricity in the national power supply.
Purchasing power is the first part of a PPA with Better Energy. Buyers can also purchase the Guarantees of Origin (GOs) directly associated with the new power plants.
Certificates: green transition or green transaction?
When companies buy electricity and GO certificates directly from Better Energy, they can ensure that they are helping to displace fossil fuels with renewable energy – a green transition. Better Energy PPAs and certificates of origin are site-specific – they represent solar energy directly traced to new solar plants. This is not always the case.
“Companies have the best intentions when they purchase certificates, but their impact is limited to none. Many are under the illusion that they are solving climate change. They are not. They are shuffling, not switching. This is often the first eye-opener,” says Rasmus Lildholdt Kjær.
The certificate system of GOs divides green power sold by a power producer into two separate products: electricity and environmental attributes (benefits). The physical electricity is sold as KWh, and the green attributes are sold as certificates.
Certificates can be traded and re-traded electronically on the global market, much like financial assets. A company usually pays a broker, and brokers pass some of the money on to the company that generated the green energy. In theory, this money should help get new energy built. However, the traded market prices are so low that the money is not enough to finance new energy. Moreover, certificates can be from older power plants. Certificates can change hands, without causing any new renewable energy to be added or produced – a green transaction, but no transition.
Double jeopardy for Danish taxpayers
Certificate trading in this secondary market also puts citizens at risk of paying twice for the same green energy. When renewable energy projects are subsidised by the government, the money comes from taxpaying citizens. If companies purchase certificates from these subsidised projects and then turn around and charge consumers extra for the “green” products they produce with this energy, the same citizens pay twice. The subsidies/citizens are the reason that new renewable energy gets built and added to the grid, not the companies.
“The certificate market is complex and misleading, and it needs an overhaul. The challenge with green certificates is that they don’t all represent carbon reductions and they don’t all drive change or represent new green energy. And there is no way for buyers to tell the difference,” explains Rasmus Lildholdt Kjær.
“Most renewable energy certificates traded on the market are produced by older or existing power plants, for example, hydropower stations in Norway or wind turbines that are already running profitably. If an older power source is in operation, the owners or brokers will certainly be happy to get money from the green certificates, but it won’t lead to more green power. You won’t add anything to the grid that hasn’t already been there. You are trading marketing rights, not changing the grid. You’re making a donation – not impact.”
This leads to another critical element of PPAs which often clouds green progress: geographic location.
Location, location, location
Bargain shopping in other geographic locations or across market zones does not save money or reduce emissions in the local energy mix.
“If the buyer’s PPA trading point and the project’s actual delivery point are in different markets (or in a market with zonal pricings) and the PPA payments are based on the price in the project’s market, the buyer is exposed to basis or locational risk. Even more experienced buyers do not realise that in markets with zonal pricings, there is locational risk,” says Rasmus Lildholdt Kjær.
Signing PPAs for projects in other countries does not make the local energy mix any greener. It was critical to the Google agreement, for example, that the new power plants be built in the same geographic grid area as the new data center.
The electricity that flows through your local power lines is determined by which power plants are currently producing electricity on the grid. If national power plants cannot produce enough electricity to match demand, electricity gets imported. In the case of Denmark, our lack of solar power means that we must import electricity during the day from other countries such as Germany. Thus, the source of your electricity is determined by your location and what time of day you consume it.
“Large energy consumers like data centers are physically connected to a local grid, so the carbon footprint of their operations depends on the current mix of renewable and non-renewable energy that is flowing through the local lines. If companies are physically located in Denmark, and they sign PPA contracts or purchase certificates from Norway, this doesn’t change their local energy mix. The physical energy they consume has not changed,” explains Rasmus Lildholdt Kjær, and continues:
“The only way a company can lower the carbon emissions of its operations is to improve efficiency, generate energy on site or add more green energy to the local grid. Virtual trading does not change physical reality.”
New phase in the green transition
“Everyone plays a role in furthering the green agenda, but the weight of responsibility is really on governments and businesses. Companies are hungry for ways to become 100 per cent renewable in the energy they use and hungry to deliver climate action with measurable results. These companies can have great impact in transforming our energy system with the right green energy products and the right policy framework,” concludes Rasmus Lildholdt Kjær.