By Patrick Falwell

For more than a decade, large companies and public sector entities (“buyers”) have used their buying power to help bring gigawatts of new renewable energy projects to the grid, often as part of meeting climate and sustainability commitments. Several factors influence how companies set and execute on their commitments, including: 1) how these procurements impact their carbon footprints as determined under the Greenhouse Gas Protocol (the Protocol classifies emissions that arise from the purchased or acquired electricity as “Scope 2” emissions) and 2) how and whether those transactions meet the requirements and expectations of third-party leadership programs such as the Science Based Targets initiative (SBTi), CDP, the EPA’s Green Power Partnership, and other leading corporate climate leadership initiatives and other audiences, whether it be ESG-minded investors or the broader public.    

Even as record amounts of wind and solar capacity come online, the pace of decarbonization in the electric sector remains off-track to achieve net-zero emissions by mid-century. In addition, leading buyers are examining how they can further leverage their procurement to achieve greater carbon reduction – through strategies such as consuming more carbon-free energy (CFE) on a 24/7 basis or seeking transactions with projects on fossil-heavy grids – and they need a system that will recognize and support their action. A recent report – Modernizing How Electricity Buyers Account and are Recognized for Decarbonization Impact and Climate Leadership – by Green Strategies and the NorthBridge Group details needed changes, but they are summarized here: 

1. Better Incentivize Maximum Carbon Reduction in Procurement Decisions  

What we call the “first generation” of clean electricity procurement typically involved the adoption of renewable “purchasing goals,” a near-exclusive focus on wind and solar, and the central role of renewable energy credits (RECs). Under typical “purchasing goals,” buyers aim to purchase renewable electricity and/or RECs to equal some share or even 100% of their consumption on an annual basis. Buyers have most often transacted for wind and solar, purchasing RECs either together (“bundled”) with the underlying electricity or separately (“unbundled”). Under incumbent Scope 2 accounting rules, buyers can then match their RECs with megawatt-hours (MWh) or electricity use. By acquiring RECs to match 100% of annual consumption, a buyer could report a Scope 2 inventory of zero under the Protocol. 

While purchasing goals are succeeding in helping bring new wind and solar capacity online, such goals do not necessarily guarantee any particular level of actual reductions in greenhouse gas emissions. For example, a buyer could source RECs from projects located on different grids (whose carbon intensity may already be relatively low or where variable renewable penetration is relatively high) than where its operations are located, while the portfolio of resources serving its own grid does not change. In addition, since the timing of a buyer’s demand and the availability of wind and solar may not coincide, the buyer is relying on firm and dispatchable generation (most likely fossil on many grids) at many times of the year. The Protocol and other programs do not distinguish whether buyer transactions for clean electricity or RECs occur on relatively carbon intensive grids or at relatively carbon intensive times. A modernized system must prioritize the carbon impact of procurement and incentivize buyers to seek maximum carbon reduction in their decision making. 

2. Amend the Greenhouse Gas Protocol to Provide Clearer Picture of Scope 2 Emissions  

The Protocol serves as a global standard by which buyers measure and disclose Scope 2 emissions under voluntary (and potentially mandatory) regimes and set “science-based” greenhouse gas reduction targets. Many interpret a buyer’s reported Scope 2 emissions as reflecting the indirect emissions arising from their consumption of purchased electricity, but that is not always the case. Given relatively few restrictions under the Protocol in matching RECs with consumption, buyers have the ability to portray otherwise carbon-positive electricity consumption as zero-emission. RECs can be sourced from entirely different grids than where consumption occurs, and RECs are matched with consumption on annual basis, not necessarily when renewable generation and demand coincide. As such, Scope 2 emissions do not always indicate the extent to which a buyer continues to rely on fossil generation to meet demand.    

The Protocol also does not distinguish between buyer transactions that differ in their level of real-world carbon reduction impact. For example, a buyer can report the same reduction in Scope 2 emissions from transacting with a CFE project on a less carbon intensive grid versus transacting with an identical project on a more carbon intensive grid. In addition, a buyer that signs a long-term offtake agreement from a CFE project or invests its own money in on-site solar and energy storage can report the same decrease in Scope 2 emissions as a buyer that purchases RECs from existing projects in a spot market transaction. 

Improving Scope 2 accounting should involve several changes. For example, limiting the matching of consumption with RECs only sourced within a buyer’s grid region would more accurately reflect whether a buyer’s procurement is changing the mix of resources on which it relies. In addition, shifting away from annual toward more time-specific inputs and matching would increase attention to when a buyer’s consumption is relatively carbon-intensive and solutions offering CFE at given times. While amending Scope 2 would provide more accurate insight into buyer’s emissions, assessment of buyer impact and leadership should not boil down solely to Scope 2 emissions –the disclosure of additional information is necessary to understand the carbon reduction impact of buyer CFE procurement.  

3. Adopt Avoided Emissions Impact as a Another Core Component of Disclosure  

The Protocol offers relatively under-utilized options (but no requirement) for disclosing the carbon emissions actually reduced (or “avoided”) from a given procurement transaction, while other climate leadership programs similarly do not assess carbon reduction impact. While there is no consensus best practice yet and buyers may not have the full range of relevant data, analyzing avoided emissions impact is possible and necessary. Even if buyers began by disclosing a qualitative discussion of the intended impact in their transactions, rather than relatively sophisticated quantitative analysis, it would establish an incentive and a mechanism for buyers to consider and report impact. Avoided emissions disclosure would support buyers who aim to maximize carbon reduction impact under various strategies, including executing transactions in carbon-heavy grids even if not their own, supporting new transmission deployment, or supporting the development and commercializing of innovative CFE technologies.  

4. Improve Disclosure to Provide Better Perspective of Emissions and Procurement Impact  

The report recommends all buyers disclose a more complete set of information – including modified Scope 2 emissions, avoided emissions, individual transactions for CFE, supplier generation mix, annual (shifting toward hourly) CFE matching percentages – under a standardized “Carbon Facts” label approach. Enhancing the depth and uniformity of disclosure will provide the marketplace with information to better assess the climate ambition of buyer procurement and whether there is continued progress in reducing reliance on fossil generation in consumption. 

5. Continued Marketplace Development to Support Higher-Impact Procurement  

Many buyers cannot automatically pursue higher impact transactions in many markets or access data on the carbon intensity of the grid at given times. Electricity suppliers must come forward with retail products that provide CFE in more places and at more times. Helping buyers access consumption data and detailed information on the resources that serve given locations on the grid should be an early and immediate step for policymakers and the market.  

Illustrative Carbon Facts Label

Carbon_Facts_Label_GS_NB_CATF_whitepaper

 

WASHINGTON, DC – A new report authored by Green Strategies and The NorthBridge Group, supported by Clean Air Task Force, calls for modernizing the current accounting system for GHG emissions from electricity procurement to better account for and recognize carbon impacts. The report provides recommendations to improve transparency, maximize effectiveness, and to better account for buyer electricity procurement actions that reduce carbon emissions. The goal of these new proposals is to stimulate faster and more GHG reductions while creating a market for clean energy technologies.

Read the report: Modernizing How Electricity Buyers Account and are Recognized for Decarbonization Impact and Climate Leadership

“Current standards have been successful in advancing the deployment of wind and solar, but we need every clean energy tool available to decarbonize the global economy to address climate change,” said Armond Cohen, President at Clean Air Task Force. “Modernizing current GHG accounting standards – as recommended by this report – can stimulate emission reductions by galvanizing large electricity buyers, including the federal government and corporations, to procure carbon free electricity.”

“The current system of accounting and being recognized for clean energy procurement simply doesn’t reflect or recognize today’s standard for climate leadership, and it is failing to keep up with what’s needed to decarbonize our economy,” said Roger Ballentine, President of Green Strategies. “Companies want to lead and have a greater role in fighting climate change. But we have a system that no longer encourages and rewards the most impactful decisions companies can make in procuring clean energy. We need to fix that.”

The report highlights how current accounting methods do not always reflect a company’s continued reliance on unabated fossil fuels for their actual electricity supply or the actual climate benefit of procurement transactions. The proposed new approach would provide to stakeholders and the marketplace more accurate information about the emissions arising from a buyer’s electricity consumption and the carbon impact of their electricity procurement through:

• Modifications to Scope 2 accounting methods to more accurately measure the emissions of a buyer’s electricity consumption;
• Increased disclosure regarding the electric generation resources that a buyer relies on and procures from its suppliers;
• Provisions for buyers to discuss and estimate the avoided emissions and climate impact of their procurements and other buyer actions;

• Encouragement for buyers to consider how well carbon-free electricity supplies match the timing and location of their electricity consumption;
• Opportunities for buyers to highlight efforts to deploy emerging carbon-free electricity technologies (distinguishing between variable and firm resources) necessary for fully decarbonizing the electric grid.

According to the report, these changes would provide a strong foundation for large electricity buyers to support and be recognized for the electricity sector investments needed to achieve net-zero emission goals, including a broadened focus beyond only wind and solar resources — encouraging the deployment of a full suite of existing and emerging firm carbon-free generation, energy storage, load management, and other technologies needed to achieve a carbon-free electricity sector.

“Study after study has found that we must develop and commercialize an expanded suite of carbon-free technologies and other solutions to achieve full decarbonization of the electricity grid in a cost-effective and reliable manner, yet our current system of evaluating a buyer’s climate-related procurement actions doesn’t adequately stimulate the development of firm, carbon-free generation, energy storage and other resources needed to balance carbon-free supply with demand in all locations and at all times,” said Neil Fisher, Partner of The NorthBridge Group. “The changes proposed in this report would help point the climate ambitions of large electricity buyers — which are significant — at the right goal, actions that will reduce carbon emissions and encourage the development of resources needed to decarbonize the electricity grid.”

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About Green Strategies, Inc.
Green Strategies is a clean energy and sustainability management consulting firm founded in 2001.  Green Strategies has worked with some of the world’s largest companies, financial institutions, and leading innovative solution providers to help them align their business strategies with sustainability and decarbonization best practices.  Green Strategies has pioneered the concept of “climate capitalism” – the notion that sustained business value creation and competitive advantage are best achieved by incorporating climate considerations and emissions mitigation into business and investment strategies.

About The NorthBridge Group
The NorthBridge Group is a leading economic and strategic consulting firm serving the electricity and natural gas sectors, including regulated utilities, competitive generators and energy suppliers, and other companies and organizations active in the energy space. The Firm’s clients include some of the largest utilities in the United States, players in the fast-changing competitive markets, climate policy organizations, and very large power users. The foundation of NorthBridge’s work is a combination of market insights, policy and regulatory expertise, perspectives on the energy transition, and rigorous analytic and economic skills. NorthBridge is a leader in formulating and evaluating investment and operational strategies to satisfy climate-related goals.

About Clean Air Task Force
Clean Air Task Force (CATF) is a global nonprofit organization working to safeguard against the worst impacts of climate change by catalyzing the rapid development and deployment of low-carbon energy and other climate-protecting technologies. With 25 years of internationally recognized expertise on climate policy and a fierce commitment to exploring all potential solutions, CATF is a pragmatic, non-ideological advocacy group with the bold ideas needed to address climate change. CATF has offices in Boston, Washington D.C., and Brussels, with staff working virtually around the world. Visit catf.us and follow @cleanaircatf.

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The above press release originally appeared on the Clean Air Task Force blog, available here.

 

Clean Air Task Force (CATF) and Green Strategies are pleased to offer comments on the SEC’s proposed rule on climate-related financial disclosures.

CATF and Green Strategies fully support the Commission in this effort to adopt required climate disclosures. We offer suggestions on ways the Commission can strengthen the Rules to better achieve their purpose.

Our main suggestions are as follows:

• The Commission should not require registrants to only disclose Scope 2 greenhouse gas emissions calculated through the Greenhouse Gas Protocol. Scope 2 reporting under the Protocol as it is currently written does not fully convey the extent to which a registrant is reliant upon fossil fuel-generated electricity. We urge the Commission to require the disclosure of additional information to more fully capture the risks related to a registrant’s reliance on fossil generation.
• The Greenhouse Gas Protocol also falls short in capturing the actual decarbonization impact of a registrant’s electricity procurement decisions – that is, the extent to which actual GHG emissions were decreased. Commission should require modest additional disclosures that provide more information on the carbon impact of a registrant’s electricity purchases.

We have included the complete version of our comments as submitted to the Securities and Exchange Commission below. We applaud the SEC for its robust consideration of the climate disclosure rule as it will be a necessary and transformative decision for both for the climate and financial risk management.

CATF and Green Strategies - SEC Comments

 

Update 6/23/22 – Comments have now been uploaded by the SEC. Please view here.

The original piece by Roger Ballentine appeared on the Business Council for Sustainable Energy (BSCE) blog.

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Securities and Exchange Commission Chairman Gary Gensler has gone out of his way to argue that the Commission is not making “climate policy” in the way that the EPA or other energy or environmental regulatory agencies might. And he is correct – the SEC’s proposed disclosure rule mandates no changes to business energy use nor sets any targets related to greenhouse gas emissions. The Commission is doing what it is supposed to do: ensure that the market has access to consistent and comparable information that may be deemed financially relevant to investors. Certainly, the world’s largest asset manager thinks it is relevant – Larry Fink says that “[c]limate change has become a defining factor in companies’ long-term prospects.”

Smart investors and smart companies look at climate change as they do any other business issue. It presents risks such as acute physical risks like extreme weather, heat waves, and drought; chronic physical risks like rising seas and loss of arable land; regulatory risks that could impose direct costs on companies; stranded assets; and reputational risks that grow with a changing climate and changing demographics. For companies that offer goods and services to serve climate change mitigation and adaptation it presents opportunities for profit. And for companies that minimize risks and demonstrate leadership it offers opportunities in the form of lower costs of capital and the attraction of talent.

So why is the SEC’s disclosure rule likely to be so impactful? Because markets are really good at doing what markets do: rewarding risk management and value creation. No investor prefers to invest in a company that is doing less to manage risk and create opportunity than its peers. And no CEO wants to rank behind her competitors in any comparison. Voluntary disclosure regimes and the increasing number of investors who consider ESG factors (of which climate change is arguably the first among equals) have already driven behavior change by companies. But investors only have the insights they can glean from the subset of companies that voluntarily disclose climate-related information and the information they do get is often difficult to assess and fully compare.

Enter the SEC.

By mandating consistent and comparable disclosure of climate risk factors (and opportunities presented by managing the climate and low-carbon transition), the Commission is simply providing more and better information about more companies to the growing number of investors who are asking climate-smart questions about their asset allocations. And information moves markets. Investors can choose (or not) to use this information to assess value and allocate capital. All issuers will need to ask questions about themselves (How are we managing climate risk? How are we anticipating and seizing opportunities?). And they will be able (as will the marketplace) to compare themselves to their peers. This question-and-answer process, along with public disclosure, will impact how companies seek to address climate change.

And it is implausible that that process will lead any rational company to determine that they need to do less to mitigate climate risk or do less to demonstrate that they understand the opportunities of taking greater climate leadership. This is what I call “Climate Capitalism.” Like any other business issue, if managed well and with an eye toward innovation and improvement, integration of climate change into business strategy will yield value accretion and competitive advantage. Mandatory disclosure will put Climate Capitalism on steroids.

About the Author: Roger S. Ballentine is the President of Green Strategies Inc.

For a recent Forbes article on Roger and Climate Capitalism, read here.

For a recent presentation deck on the SEC Rule, see here.

Many of our clients are raising questions about the Security and Exchange Commission’s proposed rule on mandatory climate disclosures: How do I need to prepare? What information will I have to report? Is this really necessary?

Our main advice: mandatory climate disclosure is coming, and companies with robust sustainability strategies are poised to gain from this new rule. And, the SEC is implementing a rule because it is necessary – for the climate, and for investors.

For our full thoughts, please view our slide deck below on what the SEC’s proposed climate rule will mean for companies and investors.

SEC Proposed Rule - Climate Disclosures_Green Strategies