Corporates have made a significant contribution to the growth of renewable energy in recent years. Investment in green electricity is a key component of greenhouse gas (GHG) emissions reduction targets set by corporates, their corresponding climate action claims and their overall sustainability strategy. It is not only important that corporates continue to drive investment in renewable energy but they should also target activities with the most positive impact in terms of actually reducing GHG emissions and displacing fossil-fuel generation.
This is becoming known as taking into account the “emissionality” of their electricity procurement activities. At a time when it is increasingly unlikely that national GHG reduction targets will be met, it is crucial that corporate investment targets areas that can provide the “biggest bang for their buck”.
In this article, we outline how corporates typically report the environmental impacts of their electricity procurement under the Greenhouse Gas Protocol (GHG Protocol) and consider how incorporating emissionality into corporate energy procurement can help accelerate decarbonisation.
Current approach to reporting GHG emissions from electricity procurement under the GHG Protocol
The GHG Protocol Corporate Standard and Guidance is a universally recognised voluntary accounting standard for corporates reporting their GHG footprint. Major corporates, including over 90% of Fortune 500 companies, typically seek to adhere to the GHG Protocol whilst reporting on, and making claims in respect of, their use and procurement of electricity and corresponding GHG emissions under the GHG Protocol's Scope 2 guidance. Scope 2 GHG emissions have historically been reported in accordance with the following two methods:
- Location-based method. This method essentially reflects the average emissions intensity of geographical grids on which electricity consumption occurs (using grid-average emission factor data) and does not take into account contracting choices by corporates; and
- Market-based method. This method reports on emissions from electricity that companies have deliberately chosen. Under this method, emissions factors are derived from contractual instruments (e.g., through corporate power purchase agreements (CPPAs)).
The benefits of this reporting framework includes its relative simplicity and standardisation. The location-based method is a transparent and relatively accessible way to compare actual GHG emissions from consumed electricity on a shared grid between organisations (without factoring in contractual instruments). The market-based method effectively treats every megawatt hour (MWh) of electricity generated from renewable sources as having the same environmental benefit. For example, if a corporate consumes 2,000 MWh of electricity in a year, the corporate can enter into a long-term purchase agreement with a renewable energy generator to purchase 2,000 MWh of green electricity and claim it has eliminated its electricity-related GHG emissions, regardless of the time and location of the renewable energy generated.
It is unsurprising that the introduction of the market-based method in 2015 coincided with explosive growth in corporate procurement of renewable energy through CPPAs. From a corporate's perspective, CPPAs are an optimal method of renewable energy procurement to reduce their electricity-related GHG emissions and often act as a hedge on wholesale energy prices.
They also give weight to claims of “additionality” by corporates who would claim that but for the long-term offtake agreement that they have signed, the project would not be able to obtain financing and would therefore never be constructed (or have a lower nameplate capacity).
However, not every MWh of renewable energy is equal when it comes to GHG emissions.
Moving towards considering emissionality
Reporting under Scope 2 of the GHG Protocol does not formally take into account the make-up of the grid on which the renewable energy generator is located or the time at which the renewable energy was generated. These are key factors which determine the GHG emissions intensity of the electricity actually consumed by the corporate. If a GHG emissions accounting standard took into account the emissions factor for a particular MWh of generated energy, then corporates would be better placed to understand how their investments can make the most positive environmental impact and will help to ensure that their electricity-related claims are as accurate as possible, which is particularly relevant in a world where there is increased scrutiny on such claims.
More granular time and location based emissions reporting would incentivise corporates to support the development of renewable energy in locations which have a higher rate of fossil-fuel generation and deter investment in areas which are already saturated with renewable energy generators, rather than simply matching load with procured volume. Such positive investments would greatly assist in displacing marginal fossil-fuel generation (such as a coal or natural gas fired plant) in particularly dirty areas of the grid (including on a global scale) and therefore increase GHG emissions avoidance (the so called marginal emission factor) and ensure capital is flowing towards grids (or parts of grid) that need it most. Focusing on marginal emissions data may also assist in more strategic deployment of new technologies, such as batteries, to make a more positive sustainability impact. In this regard, research suggests that the way in which batteries are utilised on the US grid may actually result in increasing GHG emissions rather than reducing them. It will also assist corporates with their load shifting to optimise energy consumption at times of high renewable penetration and energy efficiency strategies. Corporates are becoming more sophisticated in energy procurement and advancements in GHG emissions data (including with respect to time and location of emissions) have resulted in many corporates advocating for more emissions-based procurement and reporting.
The GHG Protocol is currently engaging with stakeholders to evaluate whether changes are necessary to the current version of the Scope 2 guidance. On the topic of formally incorporating emissionality into Scope 2 reporting, stakeholders expressed concern that under the current framework the reported reductions in an organization's emissions inventory may not actually correspond to overall GHG reductions in the atmosphere. Some called for a change from, or addition to, current inventory accounting methods to incorporate a new approach of demonstrating the GHG emission reduction effects of buying renewable energy by accounting for the marginal emissions reductions resulting from replacing carbon-intensive power plants with renewable energy sources. Respondents posited that this method would provide stronger incentives for investing in grids that have the greatest potential for reducing carbon emissions compared to current market-and location-based inventory accounting methods. We expect the GHG Protocol to report on proposed changes to the Scope 2 guidance in the near future.
The movement towards greater granularity in energy accounting has also been recognised at a European Union level. In the recently approved recast Renewable Energy Directive, a guarantee of origin (which typically has a standard size of 1 MWh) may be divided into a fraction size (provided the fraction size is a multiple of 1 Wh). This gives rise to the potential to recognise, on a more granular level, the impact of time and location on the generation of renewable energy.
Emissionality is not without challenges
Incorporating emissionality into corporate procurement strategy and reporting will not be without its challenges. Reliable GHG emissions data will need to be available. Corporates will also have to take into account the fact that with emissionality, as the rate of renewable energy generation increases on a particular grid, the sustainability impact of a MWh procured under a CPPA may be diluted over the life of the project, possibly leading to shorter tenures. The inclusion of any formal reporting of emissionality will also need to be gradually phased-in to avoid undoing the benefit of any existing corporate strategies that currently do not take emissionality into account yet still support the development of renewable energy projects.
Corporate climate action needed more than ever
Emissionality based procurement and reporting has the vast potential to ensure corporate investment is directed towards areas which can make the most meaningful reduction in GHG emissions. Regardless of whether such an approach is formally incorporated into accounting frameworks, it is likely that corporates seeking to lead on positive climate action will add emissionality considerations and analysis into their investment decision making and CPPA procurement strategies. After all, this is what is urgently required to physically reduce GHG emissions and minimise the damaging effects of climate change.
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