Written by Mathieu Xhonneux
In a previous article, we explained the concept of “green electricity” and how to account for the purchase of such green tariffs in the reporting of scope 2 emissions. Due to the laws of physics, “green electricity” does not actually imply the delivery of renewable energy to facilities, but rather amounts to the bundling of electricity on the grid (whatever its origin) and Guarantees of Origins (GO) certificates issued from renewable electricity generation. These certificates allow companies to use the emission factors of the corresponding generation units (often close to 0g CO2eq/kWh) in the calculation of their 2 scope emissions with the market-based method. Although many companies with net-zero targets rely on this technique, a series of experts claim that relying on GO purchases to decrease scope 2 emissions is misleading at best, and inoperative and assimilable to greenwashing at worst. The GHG Protocol Secretariat even acknowledged recently that the current market-based method in the GHG Protocol does not always reflect real-world decarbonization of the electricity grid. Will “green electricity” follow the same path as carbon offsets, whose ineffectiveness is nowadays well documented? We believe that such a turnaround is a real risk – but let us dive into the reality of GOs and corporate climate strategies to understand why.
In Europe, the legislative package of 2001 setting up the GO instrument created a market that is oversupplied with cheap certificates [1]. For years, the vast majority of European GOs originated from hydropower plants, most of them located in Norway. These plants, often commissioned before 1990, flooded the GO markets with certificates around 1 EUR / MWh. On the other side, demand from companies remained low as there were little incentives to purchase GOs. Since 2022, a slowly growing demand for GOs from companies wishing to decrease their scope 2, but also drought episodes in Norway, led the prices to increase to 5 EUR / MWh. Yet, this green premium of 5 EUR / MWh remains negligible compared to the wholesale electricity prices around 60-80 EUR / MWh observed early 2024 in Belgium. Several studies argue that such GO prices are indeed too low to effectively drive the installation of additional renewable energy generation [2,3,4]. If new renewable capacities (solar, wind, biomass, …) are deployed today, it is either because they benefit from government subsidies or because they are economically viable on their own, and not thanks to the certificates.
Unfortunately, from this first problem originates a second one. Thanks to the low prices of GOs, companies can easily decrease their scope 2 emissions and inflate their mitigation efforts by advertising the market-based footprint instead of the location-based one. Since the purchase of GOs does not really influence the deployment of new renewable capacities and the decarbonization of the electricity grid, company-level emission reductions obtained through certificates are unlikely to cause a real decrease of global emissions. A recent study published in Nature Climate Change showed that the current market-based method casts serious doubt on the veracity of reported corporate emission trajectories: when removing the emission reductions claimed through certificates, the combined 2015–2019 scope 2 emission trajectories of 338 companies with SBTi targets are no longer aligned with the 1.5 °C goal, and only barely with the well below 2 °C goal of the Paris Agreement [5].
Similarly to carbon offsets, it is a very possibility that the strategy of buying certificates to decrease scope 2 emissions will backfire in the future as more and more people become aware of the issue. If the purchase of “green electricity” is then no longer a legitimate solution, what should companies do to mitigate their emissions from electricity procurement? At BrightWolves, we advocate that the electricity procurement strategy of a company should always strive for additionality. Additionality is a determination of whether an intervention has an effect when compared to a baseline. In a GHG mitigation plan, reductions of GHG emissions are considered additional if they would not have occurred without the execution of the plan. When purchasing cheap GOs, there is no or little additionality, since the low green premium flowing back to electricity producers is not incentivizing them enough to deploy new renewable capacities that would replace fossil plants. Fortunately, there do exist strategies to decrease scope 2 emissions that are truly additional. We often recommend companies to consider these four options to mitigate GHG emissions from electricity use:
Reduce energy usage: the greenest energy is the one we don’t use. Wherever possible, one should think about energy efficiency solutions first. These are not only sustainable but are often also the most economical solutions. Such solutions are, however, often specific to the company’s activities and might require long-term investments.
Deploy on-site renewables: either through self-financing or leasing space to a developer to further purchase the generated electricity with the associated certificates. In the case of solar panels, there is even a positive ROI between 10 to 20% and the installation is straightforward. If your roof is not filled up with solar panels yet, just go for it.
Help to develop local renewables: by negotiating power purchase agreements (PPAs) to further buy the generated electricity with the associated certificates. PPAs are an extensive contractual agreement with an electricity producer that guarantees the selling price of future electricity generated by a specific project, such as a wind farm. Compared to GOs, PPAs are considered as market-based instruments with true additionality, as the long-term commitment from the buyer enables the producer to deploy new renewable generation capacities that otherwise would not have been installed.
Consume when the grid has low-carbon electricity: with the increasing deployment of non-dispatchable renewable capacities (solar & wind), the production of electricity in Europe is no longer a stable process, but rather a never-ending balancing act between renewable and fossil plants. When the sun is shining or the wind is blowing, dispatchable fossil capacities (e.g., gas plants) must stop to make room for renewable units who have a lower marginal cost, and vice versa. To further decrease scope 2 emissions, companies should try to implement flexible electricity usage and increase their consumption when the electricity on the grid has the lowest carbon footprint. Moving towards flexible consumption is likely to be increasingly important, particularly in areas where the grid has predictable daily or seasonal emissions profiles. The scope 2 guidance of the GHG Protocol in fact recommends the usage of emission factors with more temporal accuracy than yearly averages, to reflect the physical functioning of the grid (e.g., on an hourly basis).
Real-time carbon intensity of the grid in Spain on February 4th 2024, from ElectricityMaps.
The carbon intensity is lower during the day thanks to solar energy.
In its recent scope 2 proposal summary, the GHG Protocol Secretariat acknowledged that the market-based method in the GHG Protocol needed to evolve to “reduce instances of perceived greenwashing in corporate inventories” (sic). Among the options laid out by the Secretariat to improve the credibility of scope 2 reporting, one explicitly calls to consider additionality in the market-based method, while another underlines the need for emission factors that more closely match in location and time to where both the “green electricity” is produced and used. Although updating the GHG Protocol scope 2 guidance will take some time, it is very likely that the days of easily hiding one’s footprint by buying “green electricity” with Norwegian GOs will eventually come to an end. Energy-intensive companies that rely today on cheap GOs should thus revise their electricity procurement strategy by embedding additionality as a key driver – or to deliberately face the risk of not meeting their climate targets once the scope 2 guidance evolves.
Mathieu Xhonneux is an Engagement Lead at BrightWolves and holds a Ph.D. in electrical engineering from UCLouvain. Do you want to chat on the underlying challenges of sustainable electricity procurement & Scope 2 reporting? Please reach out to Mathieu or Peter-Jan.
Sources: [1] Jansen, J. (2017). Does the EU renewable energy sector still need a guarantees of origin market?. CEPS Policy Insights, (2017-27).
[2] Brander, M., Gillenwater, M., & Ascui, F. (2018). Creative accounting: A critical perspective on the market-based method for reporting purchased electricity (scope 2) emissions. Energy Policy, 112, 29-33.
[3] Galzi, P. Y. (2023). Do green electricity consumers contribute to the increase in electricity generation capacity from renewable energy sources? Evidence from France. Energy Policy, 179, 113627.
[4] Mulder, M., & Zomer, S. P. (2016). Contribution of green labels in electricity retail markets to fostering renewable energy. Energy Policy, 99, 100-109.
[5] Bjørn, A., Lloyd, S. M., Brander, M., & Matthews, H. D. (2022). Renewable energy certificates threaten the integrity of corporate science-based targets. Nature Climate Change, 12(6), 539-546.