Why the Guarantee of Origin market needs more technology to grow
Three major trends in the Guarantee of Origin (GO) market are pushing our industry to invest in infrastructure technology: rising GO prices, volume increases and rising complexity. Any one of these factors alone would be sufficient to warrant introducing robust systems to streamline processes and increase capacity.
The fact that these macro trends are happening simultaneously poses considerable risks to the smooth functioning of the GO markets.
The good news is that the industry is already working hard to push the technology agenda. Market participants are collaborating in working groups (AIB, RECs and others) to design our collective future. At the same time, portfolio management and workflow solutions for GOs are gaining traction.
In this article, we take a look at what’s happening and the reasons why GO-specific technology is needed to secure a bright future.
3 trends have the potential to overwhelm
First off, the sharp rise in GO prices means more money is at stake. As the value of GO portfolios rise, GO businesses are getting more attention from CFOs and Chief risk officers. This increased attention also means increased scrutiny. GO portfolio managers face more demands to enhance reporting and transparency. Robust technology solutions that offer intraday risk-reporting, audit trails, comprehensive reports, etc. are becoming must-haves.
The GO market is already growing organically at a rapid pace in order to accommodate the current demand for certificates. According to our proprietary research, GO businesses are already experiencing growing pains as manual processes start to slow processing times. And throughput will have to increase further to meet more demand as Europe (and the world) get even more serious about reaching climate targets.
The increase in GO prices has the potential to attract more professional traders and other players from more mature commodity and financial markets. These entrants could bring more liquidity to the GO markets.These professionals also have the potential to generate an enormous increase in the number of transactions, especially since they already actively use advanced trading technology.
Yet another stress factor is the rise in complexity – more complex certificates with a greater number of attributes, more projects from different regions, etc. Customers are demanding more customization, and their demands – especially in aggregate – are creating a potentially dangerous chimera. When we add in demands for 24/7 matching and granular certificates, made by influential market participants, we can see the tidal wave rolling towards us.
There is a lack of standard infrastructure in the GO markets. Some participants are using sophisticated technology to manage their GOs but the majority are not. Most are “doing their own thing.”
This lack of standard technology (or standard nomenclature, standard contracts, standard workflows, etc.) makes it more difficult for market participants to deal with each other, for data to be gathered and processed, etc. This creates unknowns, misunderstandings and increases risk for potentially very costly errors.
Looking to other markets for a way forward
The same trends have been experienced previously in many other markets, like the power markets. There, standard technology has been successful in achieving operational efficiencies and supporting massive volume growth.
The good news is that other, more mature markets provide a map that we can use as rough guidance to follow. In our whitepaper, released in Spring 2022, there is a comprehensive analysis of how we can use the European Energy Exchange’s (EEX) Power Derivatives as a benchmark to identify areas where technology can streamline processes.
Designing and implementing (standardized) technology in the GO markets is undoubtedly a longer project. Moves toward registry APIs and other standards are well underway. So, what can GO businesses do now to accelerate change?
Solutions are available now
In addition to active participation in industry initiatives, GO businesses can take an important step now by focusing inwards on their own operations. They can already take steps to automate their workflows. The ability to fully automate a GO workflow depends on whether or not a given registry has an Application Programming Interface (API) in place. If a registry does not yet have an API, workflows can still be automated to a significant degree, and offer compelling benefits.
Acting now to automate your GO portfolio management solution will give you a strategic edge.
When you transition to CerQlar, you will be able to get a comprehensive overview and deep insights into your holdings – in real time. As a result, you get the agility to act on those insights to enhance your portfolio’s performance.