Renewable energy guarantees of origin – can this trigger an Energy ‘Norexit’?

Authors: Dr. Simon Vanhove (Ghent University) and Professor Ignacio Herrera Anchustegui (University of Bergen)

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According to the Norwegian business newspaper Finansavisen[i] and specialised media channel Montel[ii], the EU and Norway locked horns over the Nordic country’s delay in the implementation of the EU’s energy directives. In March of this year, EU Energy Commissioner Simson purportedly called on Norway to implement the 2018 Renewable Energy Directive (aka RED2) as quickly as possible or face consequences. In order to avoid further backlog, the EU Commissioner assorted her demand of a five-month deadline, ending mid-August 2024. This deadline passed without disturbing anybody’s summer break.

Norway is deeply associated to the EU through the European Economic Area (EEA) Agreement, including in the field of energy law. In essence, this means that Norway transposes EU legislation into its national law once the instruments are incorporated in the EEA Agreement. Experience shows that these processes have been slow in the energy law field, as highlighted by Jevnaker in August 2024 – who also stresses this can be considered as a ‘resistance’ strategy.[iii]

In fact, incorporating energy law into the EEA Agreement might take years. Although the first Renewable Energy Directive and the Third Energy Package date back to 2009, incorporation in Norwegian law only occurred in 2018 after a heated political debate, followed by litigation that even reached the Norwegian Supreme Court.[iv] As fate would have it, the bloc adopted the successor legislation, RED2, the very same year. Its implementation into Norwegian law is pending since, in the face of heavy political resistance against some of its new concepts. Finansavisen mentions as sensitive topics the extended powers for the EU Energy Agency ACER as well as the fast-track permitting for renewables.[v]

‘Agreeing to disagree’ about guarantees of origin (GO)?

The system for guarantees of origin (GO) for renewable electricity could also be one of the reasons for the delay. Since 2021, Norway has been on the fence about leaving the GO system all together, in a bid to support its electricity-consuming industry.

What, then, was Norway’s quarrel with the GO system? Under the EU’s GO mechanism, the attribute of renewable electricity may be sold separately from the underlying commodity. Indeed, ‘Norway’s hydropower’ is oftentimes sold as renewable in Western Europe, where the supply of renewables is lower. This sale does not relate to electricity as a physical product, but rather to the proof of buying renewable energy. Hence, the physical electricity is decoupled from the guarantee of it being renewable. This is because it is not possible to determine that Norwegian-produced electricity is actually acquired by the consumer in Western Europe.

The EU approach is, therefore, market-based and designed to allow the free movement of electricity as a physical good. Similarly, GOs are traded freely across borders and independently from the underlying commodity as explained above. Once the GO is consumed (“cancelled”), the renewable energy is accounted for in the country of consumption, regardless of where the GO was generated. On the flip side, power producers that sell a GO, receive extra income from their renewable energy production.[vi] As a result, Norwegian GOs travel freely across the EU and EEA, carrying with them the virtuous renewable character. As a telling example, the Norwegian supplier mix for hydropower is around 20% (i.e.: what is ‘consumed’ domestically based on the GOs that are cancelled), while its production park consists of over 90% hydropower.[vii] In other words: a fjord-sized gap between physical reality and market results.

In practice, a supplier’s residual mix (for which it does not possess GOs) will contain much less renewable energy, and consequently, the electricity supplied to its customers will have a higher carbon footprint (with regards to scope 2 emissions). This prevents Norwegian industry from marketing themselves as ‘clean’ or ‘renewables-powered’. To compensate for this, Norwegian industrial energy customers would be obliged to purchase electricity and renewable GOs, increasing their commodity costs and hampering competitiveness. Linked to this, the Norwegian State already compensates undertakings active in certain energy-intensive industries for increases in electricity prices resulting from the EU Emissions Trading System for the period 2021-2030 under allowed state aid.[viii]

In addition to increased costs, differences arise regarding how GOs are accounted for. Compared to the EU’s market-based system described above, Norway adheres to a location-based approach.[ix] It is thus assumed that locally-produced renewable electricity is also consumed locally. This method does not take into account any import or export of GOs. However, this inevitably amounts to double-claiming of the renewable character of the electricity: both at its place of consumption (through cancellation of the GO – the EU approach) and at the place of its production (by including it in the supplier mix on the basis of local production – the Norwegian approach).[x] Implementing RED2 in Norway might reduce the leeway for such eyebrow-raising practices.[xi]

An Energy Norexit?

Market concerns about an Energy Norexit have been triggered by the EU Commission’s requests to incorporate RED2 (and the 2018-19 Clean Energy Package more generally) in the EEA Agreement and subsequently in Norwegian law. Rumors have circulated, reaching as far as the EU Commission being willing to provisionally suspend part of the EU/EEA energy regulation or treat Norway as a third country in the energy law sphere.

These worries appear to have been subdued, when very recently (and, perhaps not coincidentally, right after the EU deadline) the Norwegian Energy Minister Aasland firmly expressed his government’s desire to remain with the GO system. In his intervention, he highlighted the revenue it brings to the power sector when selling the GOs, as we explained above (and its State-owned firms – which represent about 90% of the Norwegian electricity production).[xii] To avoid industry objections, Aasland proposed instead focusing on expanding grid capacity and promoting long-term power purchase agreements. Interestingly, these concepts are also part of the EU’s 2024 market design reform.[xiii]

The fate of EU (energy) law under the EEA Agreement: can Norway be forced to comply?

It seems as if a Norwegian exit from the GO system has been averted for the time being. Yet the Directives and Regulations of the Clean Energy Package, including RED2, from 2018 have yet to be incorporated into the EEA Agreement (not to mention the rules adopted in 2024 on both the hydrogen and decarbonised gas markets and the new electricity market design). Due to this backlog, the question remains how EU-Norwegian relations will develop in the energy field. Simson’s finger-wagging earned her disgruntled newspaper headlines in Norway and will not exactly go down as a prime example of energy diplomacy in the EU periphery. Beyond the poor neighborliness argument, let’s have a look at the legal framework of the EEA Agreement. Which legal recourse does the EU have to prod Norway into compliance?

One argument that might be raised is that of sincere and loyal cooperation as a fundamental principle of the EEA Agreement. The EU and EFTA should collaborate constructively to achieve the objectives of the Agreement. Furthermore, consistency in EU and EEA law is assured through the principle of ‘dynamic homogeneity’. Thus, EEA law is interpreted and applied as uniformly as possible with EU law for primary and secondary law, including how GOs are administered.

Under the EEA Agreement, adoption of EU law into the EFTA States’ legal systems is not automatic. First, it requires a decision from the EEA Joint Committee. Second, it will need to be ushered through the national legislative procedure. Even if EFTA representatives are involved in EU law-making, offering some early warning, incorporation might take time. EU frustration with EFTA backlog, also outside the energy field, is not new.[xiv]

Suspension as the ‘poison pill’ of the EEA Agreement

The EEA Agreement provides for a mechanism to solve disagreements related to the incorporation of secondary law. If no mutually acceptable solution may be found in the Joint Committee, all “further possibilities” may be explored. The openness of this provision clearly intends to give the Contracting Parties leeway for negotiating, arguably including innovative legal solutions. This decision must still be taken within six months of referral of the matter to the Joint Committee.[xv]

Beyond this deadline, the respective policy domain is considered to be “provisionally suspended”. This suspension kicks in after an additional six-month period, during which efforts to an amicable resolution should continue. The Joint Committee may still decide to overrule this suspension.[xvi] Once triggered, the “practical consequences” of the suspension must be discussed in the Joint Committee. The suspension shall not affect the already acquired rights and obligations of individuals and economic operators.

Hence, failing to reach an agreement regarding a single legal file may jeopardize EU-EEA-Norway relations in the entire energy law field. Consequences might affect or spread to related areas, such as the ongoing dispute on the EEA relevance of the Carbon Border Adjustment Mechanism (CBAM) — a nature that the Norwegian government rejects.[xvii]Clearly, the economic and legal ramifications of this ‘atomic bomb’ would not be in the interest of the EU nor the EFTA States.[xviii] In 2018, this mechanism had only been triggered twice, and had not led to a suspension, even after the deadlines passed. Scholars seem to suggest that the looming threat of a suspension might persuade the EU to concede.[xix]

Conclusions

EU-Norway relations in energy policy have been fraught with controversy for the past years. Disputes related to ACER’s competences, conflict over the construction of electricity interconnectors and the impact they might have on Norwegian electricity prices, and now the on-going dispute on the GOs are salient examples. Simson’s call to action may be considered a last-ditch effort before bringing the issue before the Joint Committee.

This episode highlights the balancing act between Norwegian (energy) sovereignty and access to the EU/EEA free market for electricity as well as the interplay with climate change and the energy transition. Finally, it might be of interest to scholar of comparative constitutionalism and international relations, as it displays an interesting power play between the Union and its energy-mighty Nordic neighbour.

As the role of GOs increases, for instance through renewable hydrogen (RFNBO) production, the Carbon Border Adjustment Mechanism (CBAM) and corporate sustainability reporting, this issue is not going to go away. Alignment with the EU’s approach to GOs will become crucial, for both the EU’s periphery and beyond. Time will tell if Norway decides to follow suit, or not.

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[i] https://www.finansavisen.no/politikk/2024/04/09/8116615/eu-krever-norsk-ja-til-energidirektiv?zephr_sso_ott=VH23eA

[ii] https://montelnews.com/nordic/news/f4d8ed05-b9c2-4940-8674-d9ed87c6c434/eu-gir-norge-tidsfrist-for-fornybardirektivet

[iii] Torbjørg Jevnaker, Treghet som metode, Klassekampen (31 August 2024), available at: https://klassekampen.no/artikkel/2024-08-31/treghet-som-metode.

[iv] For more on the complex interaction of EU/EEA law and Norwegian energy law see: Hunter, Tina and Herrera Anchustegui, Ignacio, Ernst, Are You Kidding Me? Reflections about Norwegian Energy Law by Non-Norwegian Energy Lawyers in Konow, B.E; Marthinussen, H.F.; Skodvin, K.E. (Eds.) Fakultetsbyggar, vestlending og verdsborgar: Festskrift til Ernst Nordtveit 70 år. Cappelen Damm Akademisk. 2023 Available at SSRN: https://ssrn.com/abstract=4388031.

[v] The RED2 introduced stricter time limits for renewables permitting procedures. Meanwhile, in 2023, the RED3 doubled down on this approach, i.a. by introducing ‘renewables acceleration areas’.

[vi] A GO for 1 MWh roughly trades for a few EUR (some dozens of NOK), thus equating to a small percentage of the sale value of the underlying electricity. Norwegian State-owned energy producer Statkraft Group AS reported in 2023 around 83 million EUR / 1 billion NOK in revenue from ‘environmental certificates’, which include GOs.

[vii] See AIB mix calculations, https://www.aib-net.org/facts/european-residual-mix.

[viii] EFTA Surveillance Authority, Decision No 046/24/COL, Amendment to the Norwegian CO2 compensation scheme – increased price floor (5 April 2024).

[ix] For some recent developments, see https://becour.com/articles/epd-norway-guarantees-of-origin/.

[x] Read more about the issue, with similar concerns for Icelandic GOs, at https://www.ffe.de/en/publications/norway-and-the-double-marketing-of-renewable-energies/ and https://industrydecarbonization.com/news/the-trouble-with-european-green-electricity-certificates.html.

[xi] As Mary Polovtseva explained on LinkedIn, https://www.linkedin.com/posts/marypolo_energy-netzero-esg-activity-7196041566103179265-40tT?utm_source=share&utm_medium=member_desktop

[xii] https://admin.montelnews.com/news/10ca37dd-06f9-4e0b-9614-670a356a450e/gos-market-is-too-big-for-norway-to-exit-minister

[xiii] See e.g. on PPAs, Article 19a EMD Regulation (EU) 2019/943.

[xiv] See Arnesen/Fredriksen/Graver/Mestad/Vedder, Agreement on the European Economic Area, Article 102 EEA, 803ff.

[xv] Article 102, paragraph 4 EEA Agreement.

[xvi] Article 102, paragraph 5 EEA Agreement

[xvii] The Norwegian government rejects EEA relevance of CBAM, as it constitutes an aspect of relations to third states, see https://www.regjeringen.no/no/aktuelt/norske-posisjoner-til-cbam/id2999772/

[xviii] As the Contracting Parties recognized in Agreed Minute ad Article 111, as quoted in Arnesen/Fredriksen/Graver/Mestad/Vedder, Agreement on the European Economic Area, 818.

[xix] Arnesen/Fredriksen/Graver/Mestad/Vedder, Agreement on the European Economic Area, 819.