Guarantees of Origin (GO) prices are likely to experience another bearish shock in March as up to 26.2 TWh could hit the market via auctions.
Four exchanges – France’s EEX, Portugal’s OMIP, Hungary’s HUPXand Italy’s GSE – have scheduled auction sessions for subsidised GOs in March with a potential fifth auction also on the cards in Greece (see table).
GSE is the only exchange in the AIB area that organises subsidised GO auctions where the floor price changes for each month of GO production.
The floor price sets the minimum bid that auction participants can submit. In other auctions, the floor price is usually close to zero. However, GSE usually sets floor prices that are close to and sometimes above the observed over-the-counter (OTC) GO price.
The Italian issuing body usually holds five auctions per year, in January and March, where GOs that were issued in the year prior are sold, and in June, September, and December, where GOs issued in the running year are sold. However, GSE has organised ad-hoc auction sessions, usually when there are unsold GO volumes close to their expiration date.
In 2022 and the first half of 2023, GSE sold almost 100 % of its offered volumes. However, in the June 2023 auction session, GSE offered 5.4 TWh of GO with only 1.4 TWh sold. This left almost 4 TWh to be re-offered at the September 2023 session. This development was largely attributed to the falling GO prices that were observed for the first time in the market in early June 2023.
On 14 June 2023, the GSE announced the floor prices for the auction that would take place on 20 June 2023. During that day, Veyt observed a closing price for the benchmark Nordic Hydro GO 2023 production at 6.63 EUR/MWh, while the floor price for 69 % of the offered volumes in the GSE auction was equal to or above that price.
There was no sufficient demand for GOs at those prices. Some 73 % of the offered volumes during the auction remained unsold, marking the beginning of a new pattern in the supply-demand balance of the GSE auctions.
Three more auctions have been held since June 2023 with similar results, leading to an accumulated unsold volume of 13.1 TWh. These will be offered in a coming auction in March along with GOs issued for December 2023 production.
Based on previous auction volumes for December 2022 supply of 1.1 TWh, we could see a combined volume of about 14.2 TWh. Furthermore, we expect 4.3 TWh to be offered at a low floor price (0.15 EUR/MWh based on previous levels) due to the short expiry date, i.e. June 2024. This could result in downward pressure on OTC prices.
A similar situation is developing in Greece that could amplify the bearish impact that auctions have on the GO market. DAPEEP, the Greek issuing body, has long been planning to hold subsidised GO auctions. The amount of GOs that has accumulated in their account is around 6 TWh.
However, DAPEEP is facing regulatory hurdles putting the March auction debut in doubt. Also, it is still unclear when GO exports from Greece to other AIB countries will become possible. If the auction takes place and Greek GO exports are allowed, then 1-2 TWh of expiring GOs will be among the 6 TWh offered, depending on when the auction will take place.
Similarly, Slovakia’s OKTE, Luxembourg’s ILR and Croatia’s CROPEX exchanges may announce their own GO auctions in March. They tend to announce each session a few weeks prior. However, these exchanges usually auction very small volumes, therefore the supply impact would be minimal.
Given all scheduled and potential auctions, the market could see a maximum of around 26 TWh worth of GOs offered in March with potential volumes offered by GSE and DAPEEP not set in stone.
DAPEEP may not be able to hold the auction by March, which would remove 6 TWh from the potential supply. Furthermore, the auction rules are yet to be clarified, therefore it is not clear whether DAPEEP will implement uniform near-zero floor prices for all offered volumes or follow the Italian example of implementing different floor prices depending on the production month.
If there is a uniform near-zero floor price, then all the Greek offered volumes are likely to be sold adding to the total AIB supply (provided exports are allowed by then).
Meanwhile, GSE’s auction floor price would be crucial for the success of the March auction. In addition, Italian GOs now have an 18-month life span as per the Renewable Energy Directive (RED) II, where a GO can be traded for up to twelve months after its issuance and can be cancelled within eighteen months of issuance.
To alleviate the bearish market impact, GSE could opt to offer only 7 TWh of expiring GOs in the March auction and then hold ad-hoc auction sessions in April and May for volumes expiring by June. In this case, it will be the first time that an issuing body offers subsidised GOs after the disclosure period has expired.
However, it is unclear how much vintage swapping is happening on the market. If vintage swapping is a common practice in 2024 disclosure period, then surplus 2023 production in Italy would be carried forward to the 2024 disclosure period, causing the 2024 vintage price in the AIB to further converge with the 2023 vintage.
If GSE chooses to sell off all 14 TWh of accumulated 2023 GOs in one go, then the 2023 vintage price drop would be more pronounced in March, potentially widening the spread to the 2024 vintage.
Veyt specialises in data, analysis, and insights for all significant low-carbon markets and renewable energy.
