Written by Mathieu Xhonneux
When conducting impact assessment missions (life-cycle assessments, carbon footprints…), we often hear clients proudly saying that they “buy green electricity”, thereby implying that their electricity usage has no - or little - impact on climate change. Unfortunately, the reality is a bit more nuanced, as it is simply not possible to directly connect a company’s office or factory to the closest wind turbine or hydropower plant. In reality, despite the good marketing tricks of electricity retailer, the flow of electrons that people buy at a premium green tariff may even originate from … a polluting fossil plant ! But what is then "green electricity", and how should you consider it in your impact assessments ? Let’s zoom in on this hot but also quite cryptic topic !
During the years 2000, the successive reforms of the European electricity market led to the implementation of a new market structure in which the transport & distribution activity became a natural monopoly (e.g., Elia for the high voltage transport) whereas electricity production and retail activities were liberalized (with actors such as Engie, Luminus, Lampiris…). In this scheme, a retailer buys electric power on the wholesale market from producers, and this electricity is delivered to the end-consumer through the transport and distribution networks. However, the laws of physics do not simply bend to Europe’s market design: electrons in a grid always follow the path of least resistance. As such, it is impossible to determine what kind of plant (nuclear, gas, PV, wind turbine…) is powering your home – it is even a mix of all of them.
To accelerate the deployment of renewable energies, the European Commission introduced a market-based system of Guarantees of Origin (GO). GOs are electronic certificates which prove that the electricity bought by a power retailer has been produced from renewable energy. Precisely, one GO certificate proves that an amount of energy equal to one MWh was produced from renewable sources and fed into the power grid. GOs are electronically issued by the competent national authority (in Belgium, it is the regional regulator, e.g., VREG or CWaPE) to the renewable energy producers. If a power retailer wishes to brand its electricity supply as "green" or from "renewable sources", it must buy from producers a number of GOs that correspond to the quantity of energy sold through such green tariffs. The regulators verify whether the retailers buy and use sufficient GOs according to the consumptions of their clients.
Yet, the trading of GOs is completely decoupled from the physical power trading. A retailer can buy power from a fossil-powered plant, and still sell it under a green tariff by separately buying GOs issued in any European country (e.g., hydro plants in Norway). As such, the GO system should not be perceived as a mechanism to effectively trace the origin of electricity, but rather as a market-based instrument to finance renewable energy projects: the flows of electrons are not modified, yet an additional financial flow is streaming back to the producers of renewable electricity (the "green premium").
Nonetheless, the GO system and the "green" electricity branding used by power retailers often raise the question on how energy sourced through green tariffs should be factored in impact assessments. When calculating the carbon footprint of a company, the Greenhouse Gas Protocol defines in its Scope 2 guidance two different methods to report greenhouse gas (GHG) emissions from electricity consumption:
Location-based: This accounting method uses emission factors representative of the electricity mix for the regional/national grid where the consumption occurs, independently of the electricity contract subscribed.
Market-based: This accounting method reflects the emissions from electricity that companies have purposefully bought (or not). It relies on emission factors from GOs to calculate Scope 2 emissions, independently of the kind of plant that actually produced the purchased electricity.
Although the market-based method was designed to account for a company’s electricity contracts, the decoupling of the GO trading with the physical power trading and transmission makes its results difficult to interpret. Can we really consider electricity produced by a fossil plant, but later cancelled by foreign GOs, as low carbon? In this regard, the location-based method provides a more transparent footprint indicator: it simply reflects the physical functioning of the electricity grid.
"Green electricity" is hence a particular product: it is the addition of a commodity (the electricity itself) and a financial asset (the GOs acquired by the retailer). The commodity and the financial asset, albeit sold together to end consumers, are distinct and even traded independently of each other. It is thus no surprise that the GO mechanism generates confusion among executives and sustainability officers. This confusion is even fueled by the GHG Protocol, that justifies the co-existence of the Scope 2 location-based and market-based methods as being complementary: whereas the location-based method nudges companies to reduce their electricity consumption, the market-based method incentivizes company to subscribe to green tariffs, which ultimately should contribute to the deployment of new renewable electricity capacities.
But do GOs and the market-based method really serve their end goal, i.e., the transition to renewable electricity? Or is this system, despite its good intentions, inoperative and assimilable to greenwashing? We’ll cover this trending issue in a second article. In the meantime, we hope that you now have a solid understanding of what is hidden behind the "green electricity" buzzword!