Guarantees of Origin

Guarantees of Origin (often abbreviated as GOs) are the European system for certifying green electricity. Think of a GO as an electronic birth certificate for energy, proving that one megawatt-hour (MWh) of electricity was produced from a renewable energy source, like a wind turbine or a solar panel. In the United States, a similar system exists called Renewable Energy Certificates (RECs). These certificates are created when the green energy is produced, but they can be bought and sold separately from the physical electricity itself. This means an energy company can buy “grey” power from the grid (a mix of sources, including fossil fuels) and then purchase GOs on the open market. By “retiring” these GOs, the company can legally claim that the power it sells to you is “100% renewable.” This system is designed to provide transparency for consumers, create a market-based incentive for green power production, and help countries track their progress towards sustainability goals.

The lifecycle of a GO is a classic tale of create, trade, and retire. It's a bit like a concert ticket for green energy, but instead of getting you into a show, it gives its owner the right to claim the “greenness” of a specific amount of power.

• Creation: A certified renewable energy producer, say, a hydroelectric dam in Norway, generates 1,000 MWh of electricity. An official issuing body simultaneously creates 1,000 GO certificates, each with a unique identifier tracking its origin, technology, and date of production.
• Trading: The dam operator now has two products to sell: the physical electricity and the 1,000 GOs. They might sell the electricity to the local grid but sell the GOs to a utility in Germany. This is a separate, open market where prices fluctuate based on supply and demand.
• Retirement (or Cancellation): The German utility, which bought electricity from the common European grid, now “cashes in” or retires the GOs. By doing this, they can officially label the 1,000 MWh of power they sell to their customers as “Norwegian hydropower.” Once a GO is used, it's taken out of circulation forever to prevent double-counting.

Crucially, the electron you use to charge your phone is not the same electron that left the Norwegian dam. The GO system is a tracking and accounting mechanism, not a physical delivery service.

For a savvy value investor, understanding GOs is less about saving the planet and more about understanding the financial health and strategy of companies in the energy sector. They are a vital clue to a company's true value.

For companies that generate renewable power, GOs are a second revenue stream on top of selling the electricity itself. When analyzing a green energy producer, you should dig into their financial reports:

• How much revenue comes from GO sales? This can significantly boost profitability.
• What is their exposure to GO price volatility? A sudden drop in GO prices could hurt earnings. A company that has long-term contracts to sell its GOs is more stable than one selling on the volatile spot market.

How a utility company uses GOs reveals its long-term strategy.

• Building vs. Buying: Does the company invest its own capital in building wind and solar farms? Or does it simply buy GOs on the market to meet customer demand for green energy?
• Risk Profile: A company that builds its own assets is creating long-term value and has more control over its costs. A company that relies solely on buying GOs is exposed to market price swings and may be pursuing a less durable, short-term strategy. The former is often a sign of a more robust business.

GOs are a cornerstone of ESG investing, particularly the “Environmental” pillar. However, this is where a critical eye is essential. A company can appear very green by simply buying enough certificates, a practice some critics call greenwashing. The real question for an investor is whether the company is fundamentally changing its business to become more sustainable or just polishing its image. Look beyond the certificates to see where the company is truly investing its money for the future.

Guarantees of Origin are more than just an environmental compliance tool. They are a financial instrument that directly impacts the revenues and risks of energy companies. By understanding how they work, an investor can better assess a company's business model, profitability, and long-term strategic direction in the rapidly evolving energy landscape. They help you distinguish between companies genuinely investing in the future and those just buying a clean reputation.