11/11/2014 02:16 pm ET Updated Jan 11, 2015

Do Green Power Certificates Boost Green Power?

Every electric power plant produces two separate products: On the one hand, it produces electricity, measured in megawatt hours. This electricity is fed into the grid and it's impossible to determine where exactly the electricity has come from. On the other hand, it can produce an "ecological added value", depending on the way electricity is produced. A wind farm, for instance, emits a lot less CO2 than a coal-fired power plant. A hydroelectric power plant with a fish passage protects the local ecosystem, compared to a hydro dam project.

But how can a customer get hold of this ecological value add? The answer lies in the concept of Green Power Certificates. In many countries, for each megawatt hour, which a power plant feeds into the electricity grid, a certificate issued. There are many systems operating in the world, which manage the ecological benefits of green energy. In Europe, these are called „Guarantees of Origin" (GoO) and are mostly managed by the national grid companies. In the U.S., they are known as Renewable Energy Certificates (RECs) or Green Tags, whereby programs like green-e ensure transparency and provide certification. So when I buy GoOs or RECs from plants powered by renewable energies, I contribute to the promotion of green power and thus the fight against climate change. But is this really true?

The answer is: it depends. There are two problems with the concept of renewable energy certificates: First, as long as the overall supply of renewable electricity in a system is higher than the demand, selling one additional unit of renewable energy does not lead to the production of an additional unit - simply because existing supply is enough to satisfy also the additional demand. Second, most renewable energy certificates are produced by old power plants. They were built before the REC schemes existed. If such a plant operates profitably, without selling RECs, the additional cash from the REC will make the owners happy but doesn't lead to more green power.

This very problem exists for instance in Switzerland: In the year 2010, a total of around 60GWh of electricity were consumed. 21 GWh (37%) came from renewable energy sources. Out of these 21 GWH, only 7 GWh were specifically bought as renewable energies. The remaining amount of renewable energy was therefore supplied to customers who did not explicitly order it, and hence did not pay for it. In other words: Even if the amount of renewable energy sold multiplied by a factor of three, in theory not one single new power plant would have to be built, since today's offer of renewable energy is sufficient to cover the demand. Even if the sales of renewable electricity products rose at the current rate, the oversupply would still last until the year 2032.

In this context, the concept of "additionality" is of utmost importance. This concept states that funds from renewable energy purchases lead to the generation of energy that would not otherwise have been generated. It is only then that one can talk about "new, renewable energy."

The concept is well-known from another market of eco-certificates, namely carbon credits. A company or government can reduce CO2 emissions by buying a carbon credit. However, to have a real impact on the climate, it is necessary to invest in a truly additional project that wouldn't have happened anyway. In the case of the CO2 certificates, the UN Climate Convention as well as the "Gold Standard" foundation supported by the WWF, released strict regulations to insure that one metric ton of CO2 exists for each CO2-certificate, ensuring that the project is not just "business as usual", and ensuring that the project brings additional social and economic benefits to people living nearby.

Renewable energy certificates can be a fantastic way for private companies to show leadership and promote green power. What to do? First, strict labels should ensure quality and transparency. In Germany, the label OK Power defines that at least a third of the green energy stems from facilities that are under six years of age. The internationally valid label GoldPower ensures that 100% of the certified energy originates from additionally built new facilities, no matter where in the world power is produced and consumed. Second, customers should be more demanding about how exactly their green power is produced. Dutch Railways, for example, agreed to run on power from newly built Dutch wind farms. Third, wherever an oversupply of renewable energy persists, utilities should strive to sell only renewable power to their customers by default, until the supply-demand imbalance is covered. It's cheap to do so - in an oversupplied market, certificate prices are very low. Done the right way, corporates' green energy choices can indeed boost the transformation towards renewable power.