Prices for UK-issued renewable energy guarantees of origin (REGOs) have stabilised in recent months after the high volatility observed in the second half of 2023. However, the market will remain undersupplied for the forseeable future with price fluctuations likely to resurface ahead of the Fuel Mix Disclosure (FMD) deadline on 1 July 2024.
Between September 2023 and January 2024, CP22 REGO prices exhibited dramatic swings, soaring to a high of GBP 25/MWh before plummeting to GBP 12/MWh. Since February 2024, CP22 prices have found equilibrium, oscillating between GBP 13-15/MWh while maintaining a premium over the future vintages, as shown in the graph below.
The UK’s cessation of EU GOs acceptance has precipitated this instability, leading to a projected demand gap of 36 TWh in CP22 (2023-24), exacerbated by an earlier 15 TWh deficit from previous proof of supply restrictions. This situation, paired with speculative trading, and the inherent unpredictability of renewable energy production, has led to price volatility.
As the 1 July FMD deadline nears, the REGO market is bracing for continued fluctuations, adjusting to a new status quo characterised by a constrained supply of green attributes.
The anticipated slow pace of REGO issuance, influenced by difficulties in contracts for difference (CfD) auctions and the slow commissioning of new renewable facilities, suggests that supply growth will be modest until CP25 (2026-27). Thus, the prices for CP24 and CP25 vintages are likely to align with CP23’s price range.
Over the past decade, REGOs have exhibited a Compound Annual Growth Rate (CAGR) of 11%, increasing from 53 TWh in 2013 to 125 TWh in 2023.
The growth has been driven by a nearly fourfold increase in offshore and onshore wind issuance, rising from 21 TWh in 2012-13 to 80 TWh in 2022-23. Thefore, the REGO issuance mirrored the previous rapid expansion of renewable capacity.
However, of late, policy errors have hindered this progress. The 4th and 5th rounds of the CfD auctions (AR4 & AR5) faced challenges due to cost overruns and lack of proper price indexation. As a result, nearly 3GW of offshore capacity from AR4 is being withdrawn or downsized, and AR5 did not attract any bids for offshore wind projects.
On the positive side, RWE’s takeover of the Norfolk Zone and Ørsted’s commitment to the Hornsea 3 project represent significant strides forward. Additionally, the government has boosted the ceiling price for the ongoing 6th round of CfD auctions by 66%, from GBP 44/MWh to GBP 73/MWh. This should facilitate a successful auction, potentially adding up to 10 GW of new capacity.
However, with most projects taking three to four years to commission, REGO issuance is likely see a relatively slow growth until at least CP25 (2026-27). We expect these developments to provide price support to the next two future vintages CP23 and CP24.
The primary sources of REGOs – wind, solar and hydropower – are subject to weather conditions. For the first eleven months of CP22, average wind speeds were consistent with past years, but solar irradiation fell by 11%. A 33% boost in wind speeds in December, however, has helped stabilize REGO prices.
The UK’s demand for renewable attributes for FMD has escalated from 22 TWh in 2010-11 to 146 TWh in 2022-23, positioning the UK as one of Europe’s top renewable energy consumers.
Due to insufficient amount of issued domestic REGOs combined with FiT/CfD levy exemptions given to imports of EU GOs, the UK became a major importer of EU GOs for FMD, peaking at 69.2 TWh in CP19 (2020-21).
By CP21 (2022-23), imports had halved to about 36 TWh, largely due to higher EU GO prices in 2023 and OFGEM’s new trading evidence requirements linking REGO imports explicitly to interconnector capacity bookings, effective from 1 January 2021. The limited interconnector capacity between the UK and the EU pushed up REGO prices and curtailed EU GOs imports since 2021, ceasing entirely from July 2023.
The requirement of explicit trading evidence for presenting EU GOs since 1 January 2021 has led to a supply-demand imbalance of approximately 15 TWh for 2021-2022, causing an increase in prices. This imbalance persists even when it’s assumed that the demand for green attributes remains static at 2020-21 levels.
The total halt of EU GOs imports from July 2023 has introduced an additional 36 TWh deficit in an already strained market, resulting in a supply-demand imbalance and significant price surges for REGOs.
The current high pricing of CP22 certificates mirrors the existing supply shortfall. With the unprecedented circumstances at hand, it is reasonable to anticipate further price volatility ahead of the disclosure deadline, as reduced supply will continue to dominate the market.
Veyt specialises in data, analysis, and insights for all significant low-carbon markets and renewable energy.
