At the recent REC Market Meeting 2019, a global expert conference on renewable energy markets, price development in the Guarantee of Origin (GO) market was a topic of attention. With some product prices increased by 100% and in select cases as high as 2000%, it has woken up both risk managers and legal departments to pay attention to the associated risks in GO deals. There was clear consensus that among the solutions to manage this risk, existing trading & risk management systems – often ETRM systems – need to be updated. As the renewal energy market grows, and therefore the volume of GOs, there is a specialized solution to Mitigate Risk in the REC/GO Market: RECTracker
A GO is a green energy certificate that guarantees that one MWh of electricity has been produced from renewable energy sources. GOs are tradable products with an expiration period of one year from the date of certification. Also, when the energy is delivered, the GO is cancelled. In the next 10 years, the GO volume is projected to continue its current growth rate (accumulated volume between 2020 and 2030 12,000TWh), while prices are forecasted to more than double.
Traditional Energy Trading and Risk Management (ETRM) systems only provide the capability to capture GO purchases or sales. Because GOs get cancelled and have expiration dates, there is no single overview of the total current inventory. That brings us to one risk: Contract Risk.
When it comes to delivery of GOs, a trader can only deliver what he has available across the various registry accounts. Contract Risk is about the synchronization of when to get GOs and when to deliver GO, in order to ensure fulfilment of contract obligations.
It is therefore critical to get a single overview in order to manage the position and be able to see an accurate inventory balance for the current and forward period. This overview will include what will expire, i.e. a forward position of production, trades, retail sales consumption, and what has been redeemed/cancelled (realized inventory of production and retail sales). In essence, a system should be able to produce a Physical Inventory and a Financial Inventory. A Physical Inventory is based on demand / load forecast. The Financial Inventory trails this and therefore there might be a mismatch due to the timing of cancellation/redeeming that may leave existing liabilities. That subsequently will affect the risk and financial reporting. Additionally, the inventory management functionality accommodates optimization of how GOs will be allocated to fulfil contract obligations. This could be Trade-to-Trade matching against various attributes (technology, location etc), Peer-to-Peer matching of power deals (B2B and aggregated B2C) with desired set of certificates(s).
In the course of fulfilling contract obligations, other risks come around the corner that introduce exposures in growing GO trading activities. For example, the potential that a counterparty will fail to meet its obligations, thereby creating a negative impact on future cash-flow. This risk is also known as “Unrealized P&L“ and represents the actual Mark-to-Market, which is the difference between the actual market price and the deal price. Risks associated with credit exposure have never been higher and are mostly associated with the daily management of credit impacts such as credit limit availability, scoring, receivables and potential future exposures. Without a centralized single aggregated view of credit exposure, it is difficult to manage and discern real exposure while seeking trading opportunities with counterparties.
Pioneer Solutions is uniquely positioned with its RECTracker software application, which automates the end-to-end GO/REC tracking and management of processes from generation to assignment and retirement or expiration. RECTracker provides robust functionality for inventory planning and management, capture GO/REC trades (manual and via imports), GO/REC management (import account status from registries), counterparty and contract management, positions reporting, matching (by using inventory across several positions), price curve management, manage client margin calls, calculate Mark-to-Market, FX exposure reporting, and settlement and invoicing. Each GO will be tied to a renewable asset thus technology, fuel, expiration date can be derived. A hierarchical book structure is supported to capture comprehensive assets, purchase and sale trades. RECTracker offers a flexible book structure that allows segregation of domestic GOs from foreign GOs. In case of trading EUAs, RECTracker supports regulatory reporting under MiFID2.
Due to the continued growth of the renewable energy market, the increasing volumes of GO cancellations and customer demands are outgrowing current usage of spreadsheet-based systems, reliance on the portal with access to the registry of the certification entity or the limitations of functionality included in traditional ETRM systems. Managing this Operational Risk will help mitigating the other risks associated with trading REC/GOs. Built-for-purpose, RECTracker can help you with that. Time to ‘renew’ your system?