Sitrep: Did Iceland GO export ban open Pandora’s box?
Icelandic GO export ban
Bad publicity for both Iceland and the AIB kickstarted the Iceland GO export ban process. In November 2022, a German publication alleged that large consumers in Iceland claimed renewable energy consumption without supplementing such claims with cancelled GOs; instead, these GOs were exported outside Iceland.
Specifically, an estimated 13.7 TWh of RES-E consumption claims were made by Icelandic aluminium smelters and data centres, with only 3.6 TWh of GOs cancelled locally and 0.15 TWh of imported GOs (2021). Given that these amounts were insufficient to prove the marketing claims of the smelters and data centres, the AIB initiated a compliance assessment with the EECS rules by issuing body Landsnet in January 2023, which resulted in the export ban on 27 April 2023.
After Landsnet provided more information on the issue, the AIB has conditionally lifted its export ban on 2 June 2023, although the German issuing body for guarantees of origin, UBA, still has the ban in place until 31 August 2023. Note, it is still possible to export Icelandic GOs from the German registry. In its decision, the AIB explains that the suspension could be reinstated if double claiming is taking place, meaning that it will ultimately be up to Landsnet to work with its offtakers to figure out who uses location-based reporting, and if so, cancel the GOs corresponding to their consumption upon issuance.
This is not the first time Iceland gets slapped with an export ban, although in the past double counting was at play and related to disclosure practice, whereas currently the ban was instigated on the grounds of double claiming. A precedent exists from 2012 when VREG (Flemish Regulator of the Electricity and Gas Market) ruled that the Icelandic disclosure practice at the time resulted in double counting and subsequently suspended the import of Icelandic GOs on 23 August 2012. The Icelandic government in turn passed a law amending disclosure practices, obliging suppliers to prove the origin of supplied electricity by means of GOs, or by using the new Icelandic residual mix. Consequently, the ban was lifted on 15 November 2012.
A similar decision was applied to Norwegian GOs, with the import ban lasting from 23 August 2012 to 9 January 2013. The ban had a negligible impact on overall prices (GOs traded at around 0.15 – 0.25 EUR/MWh) and market activity for Norwegian GOs, as most hydro GO volumes went toward Central and Western European countries, as well as Sweden. In response to the ban, NVE modified the disclosure method in Norway, which led to the suspension of the ban.
Double claiming: location-based vs market-based
The GHG Protocol is a reporting standard that spells out how companies should measure and report their GHG emissions. It requires dual reporting for corporates that disclose to the Climate Disclosure Project (CDP) and operate in markets providing product or supplier-specific data in the form of contractual instruments, such as in the EEA. This means that the companies need to employ both location- and market-based reporting when accounting for their renewable electricity use.
However, it is still up to companies which method to use in their communications. Electricity consumption in Iceland is dominated by its three aluminium smelters and nine data centres. Of these, only two aluminium smelters report under the CDP (Alcoa and Rio Tinto) and thereby use GHG Protocol reporting guidance; yet instead of dual reporting, they employ a location-based method. In Norway, as in Iceland, Alcoa uses a location-based method: both countries are part of the EEA, and the local electricity mix consists almost entirely of hydropower.
Since CDP reporting is a completely voluntary endeavour, the companies cannot be punished for selective reporting. Non - CDP companies have no reporting obligations; and can claim 100% RES-E consumption (location-based method) in their marketing communication in Iceland. However, the EU works on legislative architecture that will make greenwashing punishable. The “offenders”: will be subject to penalties ranging from fines to confiscation of revenues, inter alia. Above all, there is a risk of reputational damage.
Currently, the GHG Protocol undergoes revision; the organisation has now gathered market participants’ feedback, based on which it will further refine the standard around 2024 (see timeline). There were 403 answers with very varying arguments; overall the opinion was divided with some arguing for maintaining the requirement for double reporting and others pushing for single reporting based on either location- or market-based method. There were also calls to introduce a new emissions impact reporting requirement. At this stage, it is unclear which way the reporting will lean – market-based or location-based, however, it is likely that the overall criteria will become more stringent.
Legal framework
In this situation, the main concern is that producers were punished for offtakers’ behaviour. The AIB relied on EECS rules and Article 19 of RED to handle the situation. In the meantime, the EU currently is working on a string of legislations to prevent false environmental claims, ultimately putting the responsibility on offtakers. As the legislative files discussed below have not been adopted and are therefore not in force, it seems that the AIB chose to revert to available instruments in its toolbox to mend reputational damage to the GO system, as opposed to pursuing action against offtakers, which is outside its remit.
On double counting and double claiming, recital of the Renewable Energy Directive (RED) states:
The recital avoids normative language and provides legal context, and thus has limited legal force in so far as it can only be used to interpret legislative documents. On the other hand, Article 19 of the RED has legal force. To prevent double counting, the following paragraphs instruct:
Thus, the RED places legal responsibility on Member States or the designated competent bodies to prevent double counting, while the question of double claiming is omitted.
EECS rules do not explicitly mention double claiming but refer to double counting. The rules place a requirement on members to maintain the quality and integrity of EECS products, which was taken as a basis for AIB’s action. Veyt had a chance to have a look at the AIB’s assessment report. The AIB relied on the EECS rules N9.1.1, A2.1.2, C3.3.1, and E3.3.14 to issue the export ban.
The rules read:
The wording of the non-binding section A suggests that all AIB members are responsible for not permitting GO cancellation where there is reasonable doubt to believe that other methods than market-based are used to claim RES-E origin.
To interpret this section, one should refer to the EECS definition of disclosure, which follows one in the EU Internal Electricity Market Directive: “Provision of information to a final customer on the share or quantity of the energy supplied to them as having specific Attributes”. It is about statements made to final consumers and therefore does not cover voluntary environmental claims by those consumers even in the context of voluntary disclosure under the CDP reporting. Therefore, final consumers do not breach the EECS rules; while the residual mix is specified on consumer invoices who do not purchase GOs in the AIB domains.
The AIB assessment panel concluded that C 3.3.1 delegates the responsibility to the AIB members to ensure that a GO is only issued when no other form of disclosure is taking place; on the basis of this, if the issuing body is aware of a situation whereby a GO is issued for the output that is claimed using location-based reporting, the supplier is double counting and breaches the rule.
Whereas rule A2.1.2 is non-binding, E3.3.14 extends it by placing an obligation on AIB members to ensure sole proof and may require an issuing body to put in place appropriate mechanisms to ensure uniqueness. The AIB assessment panel therefore believes that if the issuing body has cause for doubt, it cannot remain passive and “must instead actively engage to address the issue”.
The rest of the criteria against which double counting/claiming is judged suggest that in Iceland although the residual mix is issued by government agency Orkustofnun, consumers disregard this: this is evidenced by a comparison of the volume of GOs remaining in Iceland – net imports and exports indicate the discrepancy.
This means that EECS members should try their best to ensure that GOs are the only accepted evidence of RES-E origin and that no other form than market-based disclosure can be used for RES-E associated with the EECS GOs. Ultimately, in the case of Iceland, this implies responsibility on Landsnet to ensure compliance; but in practice the regulatory mandate vests with Orkustofnun.
Offtakers’ responsibility
When it comes to placing responsibility on the offtakers, under the Corporate Sustainability Reporting Directive (CSRD), large companies will need to publish separate sustainability statements as part of their management reports from 2024, affecting approximately 49 000 entities in the EU. The CSRD does not directly oblige companies to increase their RES-E share or lower their GHG emissions but introduces legally binding reporting requirements.
Under the draft European Sustainability Reporting Standards (ESRSs), companies will need to report GHG scope 2 emissions using both location-based and market-based methods, essentially adopting the approach of the GHG Protocol. Under CSRD where no such mandatory obligation exists, however the ESRSs would enforce this. The directive is already in force meaning that Icelandic offtakers should no longer be able to do selective reporting and need to start cancelling GOs to prevent double claiming at the roots.
The Green Claims Directive proposal covers all companies operating in the EU and EEA that make environmental claims in the context of business–to–consumer (B2C) communications in the European internal market, except for sustainability information in the finance sector. The green claims need to be substantiated based on methodologies that take into account relevant international standards and the life-cycle emissions of products. This will steer the companies to employ the Science – Based Target Initiative, the GHG Protocol Scope 2 Guidance, and ISO 14067: 2018 on the Carbon footprint of products to substantiate specific environmental claims.
The Directive seeks to incentivise the use of environmental footprint (EF) methods and GOs have a specific role to play for this purpose. According to Annex 1 and 3 to the Commission’s EF Recommendations, which include guidance for Product Environmental Footprint (PEF) and Organisation Environmental Footprint (OEF) methods, respectively, electricity used from the grid shall be modelled as precisely as possible.
Preference is given to supplier-specific data, with reference to carbon footprint quantification of ISO 14067:2018, where there is a 100% tracking system in place or where a tracking system is available with a set of minimum criteria to ensure the contractual instruments are reliable. GOs in the EU/EEA market meet these minimum criteria, making them an integrated part of the PEF and OEF methods that the Green Claims Directive seeks to incentivise. This should make it possible to use GOs to make environmental claims in line with the information contained in the certificate. This will further steer the market away from double claims.
Claims made by electricity suppliers that their electricity is sourced from renewable sources are not covered, in accordance with their obligation to do so by using GOs under the Internal Energy Market Directive.
Market impact – should other markets worry?
Market participants are worried that the proverbial “double counting/claiming witch hunt” has just begun; it is probable that there are similar cases of double claiming in other countries. The numbers in the production and supplier mix of Iceland and Norway (RES share in the production mix for both countries is over 98%, whereas the supplier mix is greater than 25%) would suggest that the offtakers are not interested in purchasing GOs and opt for location-based method to claim RES-E consumption, as opposed to the market-based one.
However, according to the AIB, there are currently no ongoing investigations against other AIB members; yet the organisation periodically audits its members’ compliance with the EECS standard, which leaves the door open for similar bans in the future. Just how likely they are is difficult to assess. On the one hand, the AIB needs to navigate the market that has a tough time regaining confidence in the GO system considering that the AIB has not made the compliance assessment report publicly available. On the other hand, the GO system suffers from occasional concerns, from questioning additionality to greenwashing accusations.
Norway being the largest Hydro GO issuer on the market, with exports five times those of Iceland, did not face any consequences. The assessment of the situation in Iceland was made easier by its smaller size, yet proving double claiming on a large scale in Norway as in Iceland is difficult and needs to be judged on a case-by-case basis.
It is known that some offtakers use location-based method to report RES-E consumption in Norway as opposed to market-based, but solving the issue requires a more targeted approach. This makes it unlikely that the AIB will issue a similar export ban for Norway.
When news of the Icelandic export ban hit the market, confidence in the flagship Norwegian GO remained unaffected: at the end of May, the trades reached almost 8 EUR/MWh, climbing down to 6.5 EUR/MWh at the start of June, largely affected by seasonal factors and auctions. While double claiming is harder to prove, double counting concerns are most likely to arise next in Norway due to the difference in residual mix calculation between Norway and the AIB.
The ban had a negligible effect on the trading of Icelandic GOs on the spot market: the trading activity has been normal, with GOs selling around 10 eurocents lower than usual.
Landsvirkjun observes since the cost price of powerplant options that are in the pipeline is higher than for current powerplants in Iceland, GOs are an important factor in determining the profitability of new projects. The temporary export ban and the uncertainty that has followed could therefore have a negative impact on the development of future renewable projects in Iceland. The supplier has a new hydro plant coming online around 2027 (700 GWh) in addition to wind and geothermal projects. This should inject considerable GO volumes into the market.
At present, international standards accept both location-based and market-based reporting methods. However, EU legislation clearly favours the market-based approach. In light of the current situation, it is possible for the AIB to revise EECS rules. If the rules are strengthened to prevent double claiming, this would further promote the market-based approach and support GO prices, as we can reasonably expect bullish demand for EACs.
While the Icelandic export ban has caused prices to dip slightly in the Icelandic GO market short-term, if the AIB is successful in putting pressure on local issuing bodies/regulators, then GO prices will go up as a consequence of more companies being forced to turn to market-based reporting.