by: Garrett Keraga | March 28, 2022

In 2022, it seems that we’ve reached a crescendo of pressure from regulators, investors, customers, peers, and other stakeholders pushing companies along a sustainable path. Things that were once considered exceptional – such as pledging to reach net-zero carbon emissions or using 100% renewable electricity – have quickly become necessities for many companies to keep up with their peers. When we look back at the sustainability landscape over the last few years, it’s easy to see how this sudden boom of ESG has led to some confusion.

As companies enhance their ESG strategy and commit to public-facing initiatives, it becomes crucial to understand how different interventions factor into their corporate carbon accounting. How can carbon offsets be used? Where can companies account for renewable energy? What projects can be undertaken to decarbonize? And ultimately, which of these efforts should be prioritized in an ESG strategy? Companies need to be able to answer these questions and communicate their strategy effectively to stakeholders. In this blog, we explain the role renewable electricity has in corporate sustainability.

How does renewable electricity factor into corporate carbon accounting?

Renewable electricity is often one of the first levers considered when creating a corporate ESG strategy, and the global transition to clean energy is accelerating every year. Bloomberg reported that global renewable energy investment grew by 6.5% in 2021 to a new record of $366 billion. For companies, switching to renewable electricity can be just part of a decarbonization strategy, or specific goals around renewable electricity consumption can be set, such as those set through RE100. When companies plan out renewable electricity adoption, there’s a lot to decipher.

First, companies need to understand how to account for renewable electricity in their carbon footprint. For this, as with all carbon accounting questions, companies will want to reference the Greenhouse Gas (GHG) Protocol, and here specifically – the Scope 2 Guidance. Scope 2 covers indirect emissions from purchased electricity and other purchased energy – basically, the emissions created by the generator of that electricity when the generator is not operated by the company conducting the carbon inventory. For most companies, this refers primarily to electricity from the grid.

Location-based Accounting: Within Scope 2, one option is to account for electricity emissions with a location-based emission factor, where reporting entities use an emission factor based on local grid mix to determine their emissions. This doesn’t allow for contractual instruments, such as Renewable Energy Credits (RECs), to be used to switch generation attributes and lower emissions.

Market-based Accounting: However, the other option – market-based accounting – allows for consumer choices in energy generation and contractual instruments to be reflected in the emission factor. In other words, continuous contracts with a supplier to use a renewable generation, or one-time REC purchases, can be accounted for in the market-based approach. Companies that are considering building renewable electricity into their ESG strategy should utilize a market-based carbon accounting approach for Scope 2.

What renewable electricity options are available to companies?

Option 1: RECs are a common entry point for companies starting to use renewable electricity. RECs represent a certified unit of electricity production from a generator. RECs must be retired on behalf of a specific entity, and once retired, that electricity generation cannot be accounted for elsewhere. RECs are often third-party-certified by entities such as Green-e® Energy. As more RECs are retired, the remaining grid mix, called the “residual mix” gets dirtier, further incentivizing companies to adopt renewable electricity. RECs can be simply purchased in bulk and used to switch a company’s entire electricity consumption to renewable sources each year. Similarly, companies can work with utilities to opt into low-carbon energy contracts, which often work by providing RECs to the purchaser. However, some critics argue that purchasing renewable electricity through RECs stunts companies’ impact on increasing the total amount of renewable electricity on the grid. Companies will also often seek to move beyond RECs to avoid the annual expenditure and price uncertainty in their renewable electricity supply.

Option 2: Onsite generation is another choice for companies, especially those that own property and/or their facilities. Rooftop solar is one popular example. Onsite generation can also occur in leased or rented spaces through collaboration with landlords. This strategy is most often employed in facilities or properties where a company has a long-term lease and plans to stay in a particular location for the foreseeable future. Companies should note that they can only take credit for renewable electricity that is generated onsite if they use power directly from their system or retire RECs generated by their systems on their own behalf. If RECs are sold, that company cannot take credit for the renewable electricity it produced on its site.

Option 3: Many companies who don’t have the assets to invest in onsite renewables opt instead to pursue a Power Purchase Agreement (PPA). In a low-carbon PPA, companies will pay a third-party to develop and maintain a renewable electricity system and sell that energy physically or in the form of credits back to the company. When credits are sold back to the company, but the electricity itself is consumed elsewhere or sold to the grid, these agreements are called Virtual Power Purchase Agreements (VPPAs). Typically, companies will size a PPA based on their energy consumption and will often develop a project along with other interested companies.

In all of these cases, renewable electricity can be accounted for in a company’s carbon footprint, as long as the company uses the market-based approach for Scope 2 accounting and retires the renewable generation credits on their behalf or directly consumes renewable electricity.  

   
Source: GHG Protocol Scope 2 Guidance (linked above)

“Additionality” in renewable electricity – is it an effective or appropriate metric?

In the world of carbon offsets and project development, “additionality” is a strict qualifier that assesses whether a project was caused by intervention above and beyond regulation. To be additional, it must be determined that a project would not have happened without the intervention of the entity supporting the project. When evaluating what type of renewable electricity strategy to pursue, companies tend to ask themselves about additionality and whether they are supporting a new project – through a PPA, for example. But is this term really applicable to renewable electricity?

Ultimately, additionality isn’t a term that should be used to discuss renewable electricity. The GHG Protocol Scope 2 Guidance advises that “Offset additionality criteria are not fundamental to, or largely compatible with, the underlying rules for market-based scope 2 accounting and allocation.” Additionality is used to qualify projects that are an improvement over a baseline. For example, in carbon offset projects, what is being measured is a change in avoided GHG emissions from a theoretical baseline without intervention. In renewable electricity, direct energy use attributes are being claimed rather than separation from a baseline. It’s also a challenge to determine what is really “in addition” to regulation in the world of renewable electricity. On top of that, there are more aspects of additionality as used in project development, like proving that technology isn’t commonplace, which aren’t useful to apply to renewable electricity.

That said, companies may still face criticism if it’s perceived that they aren’t doing enough to support the development of new renewable electricity sources. Voluntary programs can be developed to address this concern, but for now, companies should stray away from the term “additionality” to avoid making a false claim. In the words of the GHG Protocol Scope 2 Guidance “Maximizing the speed and efficacy of voluntary initiatives in driving new low-carbon development is an important, complex, dynamic, and evolving process for program implementers, regulators, and participants.”. Supporting development of new renewable assets is an ongoing challenge that companies can help accelerate as they increase demand for renewable electricity.

Creating a corporate renewable electricity strategy

As companies face the challenge of adopting renewable electricity and developing a robust plan to meet stakeholder demands, ClimeCo is here to develop a strategy that is right for you. For more information or to discuss how ClimeCo can drive value for your organization, contact us at info@climeco.com.

About the Author

Garrett Keraga is a Manager on ClimeCo’s Sustainability, Policy, and Advisory team based in Burlington, Vermont. His sustainability work has included greenhouse gas accounting, carbon abatement planning, ESG strategy development, and disclosure advisory. He has worked with a large variety of industries, both across consumer-facing and industrial clients. Garrett holds a Bachelor of Science in Mechanical Engineering from the University of Vermont.