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
