As concerns about our changing climate grow and consumers become more conscious of the impact of their choices, the market for trading in renewable energy certificates is set to increase in both visibility and importance. Below we look at the current structure and potential future regulation of this rather nascent market in the United Arab Emirates (UAE).
What are Renewable Energy Certificates?
Renewable Energy Certificates (RECs) are non-tangible, tradeable energy commodities. A REC represents the bearer’s property rights to non-power attributes of one megawatt-hour of electricity that has been generated from a renewable energy source. Non-power attributes are the environmental and social characteristics of electricity generation and include the renewable fuel type and emission rate of the renewable source. These certificates can be sold as energy commodities once the power provider has input the energy into the power grid, ultimately enabling end users to make reliable claims about their energy consumption.
Depending on the region, RECs can be referred to as Guarantees of Origins (GOs) in Europe or Green Tags, Tradable Renewable Certificates (TRCs) or RECs in North America. Regardless, the idea is the same and all of the above are different names for Energy Attribute Certificates (EACs).
As noted, in order to be able to make statements about their energy consumption, consumers (both households and large organisations) use EACs to validate their energy claims. This is done via a book-and-claim system, which books all injected energy charges as unique units. These units can be traded independently from the underlying electricity and only the person or entity that ‘cancels’ this unique unit can claim the usage of that specific megawatt-hour. This prevents the attributes associated with the certificate from being claimed by another end user and is the cornerstone of EACs worldwide. This is important as energy generated from renewable sources cannot be distinguished from non-renewable energy once it is on the grid. Therefore, purchasing a REC from a producer is the only way for end-users to claim that the energy they are using is “green”.
Global Regulatory Structures
Globally, levels of government involvement in EAC schemes vary. This is largely due to the fact that the life-cycle of an EAC can be created and concluded through independent organisations alone. The most developed EAC schemes are established within, and supported by, a legal framework. However, this it is not a prerequisite.
An EAC issuer is a body that is responsible for issuing and tracking EACs. Importantly, an issuer’s role is confined to a specific geographic area for which they have responsibility. Issuers do not generate or trade in EACs themselves but rather act as market facilitators. Issuers may be for profit, non-profit, private or public entities but will often be the grid operator or energy regulator of a country or region.
The International REC Standard and Adherent Schemes
EAC scheme operators often opt to adhere to the International REC Standard (I-REC Standard), which was prepared by the non-profit International REC Standard Foundation. The I-REC Standard is a list of rules, regulations and best practices, which can be used by REC tracking systems (which are managed by the issuers). These combine to form a standardised I-REC Code, which can be implemented in any country or region.
In order for an EAC scheme to comply with the I-REC Standard, local stakeholders and government authorities must facilitate implementation in adherence with any local or national regulations. Consequently, any underlying legal framework will be country-specific and often is contractual in nature rather than regulatory.
Another EAC system is the European Energy Certificate System (EECS). The EECS is a European framework for issuing, holding, transferring and processing electronic records. It was developed by the Association of Issuing Bodies (AIB) with the aim of providing a properly regulated platform for RECs as proposed by the EU Renewables Directive 2009/28/EC (which supports European Union Directive 2009/72/EC, otherwise known as the Internal Electricity Market Directive). The AIB is an umbrella organisation of European GO issuing bodies. Membership in the AIB is voluntary and the AIB is not an EU body. Currently, the AIB’s membership is made up of issuing bodies from 24 EU Member States.
RECs in the United Arab Emirates
In 2016 the Supreme Council of Energy (the national authority of the UAE) granted the Dubai Carbon Centre of Excellence (Dubai Carbon) an exclusive right to develop and implement a REC tracking system in the UAE which is compliant with the I-REC Standard. As the issuer for RECs, Dubai Carbon is solely responsible for facilitating this system and maintaining international standards of quality and transparency at a national level. Currently, there are no other regulations or organisations in the public or private sector that expressly govern the issuing and/or trading of RECs in the UAE.
In the UAE, RECs are issued by Dubai Carbon to an energy generator’s account or to the account of an appointed representative. Market participants who have accounts with the tracking system are then able to trade the RECs. Globally 95% of RECs are traded through Over-The-Counter Markets, yet REC trading is moving to more sophisticated market structures as demand continues to increase.
It is important to note that RECs themselves have no value. Rather, end users are paying for the rights to the attributes that a REC identifies. The value of these certificates is therefore determined by the market and how much consumers are willing to pay to claim the use of a certified unit of energy. The demand for RECs in the region is growing, which is most recently evidenced by the 2019 deal by the Dubai Electricity and Water Authority (DEWA) to sell 20,757 of its RECs to Unilever.
The Future of RECs in the UAE and GCC
Currently, only a small percentage of electricity in the GCC is generated from renewable sources. The UAE Energy Plan 2050 aims to change this and increase clean energy use by 50% and improve energy efficiency by 40% by the middle of the century. It is predicted that, as the focus on renewable energy and energy trading increases, so will demand for a localised REC regulatory framework that streamlines the issuance process and ensures compliance with international REC standards. As REC transactions become more complex, market participants will increasingly require clarity on if and how RECs trading is regulated. RECs may in many instances look, feel and act like financial instruments and financial services regulators may need to revisit their regulatory framework to assess whether the existing rules capture RECs trading or if new rules are necessary to cater to this growing market.
Given the significant interest in renewable energy from multinationals operating in the region, this sector is on track to grow and the UAE, with its business-friendly regulations and swift decision-making processes, is set to lead the way.