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Be Green! Buy Hydro NOT Wind

by on June 3, 2013

The Dutch Energy Company (Nederlandse Energie Maatschappij, NLE) created a publicity stunt to weeks ago in which it called other energy suppliers liars  (Jokkebrokken). They claim green energy from hydro-electric-powerstations bought with green certificates from Scandinavia is less green than windpower generated in The Netherlands.  Although there claim is not new, it is still NOT correct, as I hope to demonstrate in the remainder of my blog.

Most people believe that global warming is a global problem. To tackle the problem, countries have agreed to meet renewable energy targets. Once the target is set it is the duty of policymakers to reach this target as efficiently as possible. Different countries have different endowments of natural resources (including mountains needed for hydro-powerstations). It is inefficient to demand that one can only meet the target with energy produced within national borders. So how do you make the system more efficient?

Well you set up a trading scheme through which countries can buy certificates from other countries where renewable energy is produced more efficiently and sustainably. Green energy bought from Scandinavia reduces the quota of Scandinavian green energy and increases the amount on the Dutch green energy account. Without having a single coal fired powerplant Norway has an 46% coal power mix.  Norway has also committed to comply with the EU climate targets.  As there are not enough certificates to meet future targets, new renewable energy facilities will need to be built for both countries to reach the target. .

So what should happen? The prices of an additional certificate should become the same across sources.

Currently Scandinavian hydro-power green certificates (GoO) are approximately 0.40 euro/MWh, whereas green certificates from Dutch windfarms are about 2.00 euro/MWh (excluding government subsidies). Both certificates account for the same amount of green energy. Dutch business (and much of the rest of Europe) should be buying their green energy from Scandinavia as long as this is the cheapest option.  As the demand for Scandinavian certificates increases and more are sold in the rest of Europe, the price will increase. When Scandinavian countries run out of increasingly expensive certificates,  they will consider expanding their current stock by investing in further renewable resources. Thus the most efficient source of renewable energy will constantly be expanded. More and more Scandinavian certificates will be bought until the price of an extra hydro-certificate is higher than the next best option. As long the European target is not met the price of this second best option will also increase until a third option becomes just as cheap, and then a fourth ect…  Eventually, the marginal cost of an additional unit of green energy will be equal across sources.

In short, if you believe that we are facing a global problem and do not believe that the nationality of your energy production matters, let the market do its job and buy the cheapest option available within the trading scheme. This is not just the cheapest option for the company concerned, but it will lead to a more sustainable energy production by promoting the most efficient source of green energy, leading to a swifter and cheaper reduction of emissions.

(** these thoughts are my own and do not represent those of my employer)
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