ESG reporting has gone mainstream—with the consensus now that ESG risk is investment risk, it is paramount to assess and disclose ESG performance as we enter the low carbon transition. And in the wake of the COVID-19 pandemic, which has caused trillions of dollars in losses globally, the necessity for companies to put sustainability at the top of the agenda is more important than ever before. The reallocation of capital towards sustainability-focused companies has been described by BlackRock’s Larry Fink as a “tectonic shift.”
While all ESG metrics are important, the “E” presents the biggest existential threat, is the most technically challenging to measure and improve, and is the area where technology is most needed. It is estimated that USD 3.4 trillion will be invested in renewable energy in the 2020s. Firms are increasingly reporting their performance on ESG metrics, and a plethora of net-zero pledges have been made. While these are steps in the right direction, public commitments represent the simplest part of the equation. Achieving emissions reductions is where the real work begins. In this article, we will put a spotlight on the transition to renewable energy, examining the different options available for corporate buyers, identifying the advantages and limitations of each, and outlining how software can support accounting for renewable energy.
An overview of renewable energy procurement options
Generating renewable energy onsite is a local solution that offers companies a number of advantages. Installation of equipment to capture energy from the sun, wind, water or other renewable energy sources is becoming increasingly cost-effective for corporations and offers short payback periods. In addition to helping companies meet their sustainability targets, they can also yield significant returns on their investment thanks to a number of government incentives, which obviously vary by locality. In the USA, these incentives include investment tax credits, performance-based incentive (PBI) measures and property-assessed clean energy (PACE) financing loans.
With direct access, onsite generation projects also offer companies improved power quality and supply reliability and offers a hedge against the financial risks that accompany a grid failure. The Texas power outage in February, estimated to have cost the state upwards of USD 100 billion, highlights the enormous financial losses that can result from a power outage and dependency on the grid.
However, given that renewable energy generation can range from surplus to insufficient, onsite generation does require reliable, long-term energy storage so that surplus energy can be stored at times of peak production and distributed at times of peak demand. Battery storage and green hydrogen offer solutions for renewable energy storage, however both need to be scaled to become more cost competitive.
Purchasing green power from a utility
Many utilities offer the option for companies to pay a premium for the guarantee that electricity purchased is generated from a renewable source, backed by an ‘energy attribute certificate.’ The premium paid is typically small and covers the increased costs incurred by the utility when adding green energy to its power generation mix.
Utilities will often sell green power as a block, which is a fixed energy quantity (often 100 KWh of 100% renewable electricity sold for a fixed monthly price). Companies can then purchase as many blocks as they need. Another purchasing option is percent of use. In this model, companies purchase green power in an amount based on a fixed percentage of their monthly electricity use. This allows companies to purchase blended green and conventional power.
One advantage of purchasing green power from a utility is that companies do not need to manage or retire certificates easing implementation. On the other hand, purchasing green power can provide cost challenges since your company is dependent on the supply options available and the local regulatory environment. If your company is purchasing green power from a utility for the first time, learning about the market and the options available will require time and effort, although these costs will decrease as you gain experience with the purchasing procedure.
Power Purchase Agreements (PPAs)
PPAs are long-term agreements companies make with electricity producers that define the amount of electricity to be supplied, the price, the length of the agreement and other more specific details such as transmission issues, credit and insurance. These agreements are critical for the success of solar power plants and wind farms since they secure a long-term stream of revenue for the project. By going directly to the power producer, it cuts out the retail layer giving companies significant savings (and they can control the source of the renewable energy they buy).
On the other hand, as an offtake of the power produced, companies take on the responsibility of balancing the grid, so PPAs require firms to measure and manage their energy usage. Additionally, signing a procurement contract can be a lengthy and costly procedure requiring the involvement of accounting and advisory firms.
Similar to onsite renewable generation, companies signing PPAs will also need power backed up by a baseload component due to the intermittent nature of renewable energy. Without the necessary battery storage to manage through shortages, companies may need to arrange a sleeved PPA, where an intermediary utility transfers energy from a renewable energy project and ‘sleeves’ it to the company at its point of intake, for a cost.
PPAs are not only for multinational companies. Blockchain technology has made it possible for large contracts to be split into smaller units. Essentially, there is no limit on how small the units of energy or the length of time can be. With a secondary market for PPAs, this now means that firms can on-sell their power agreement if their energy requirements change.
Capturing credit for grid-supplied renewable electricity
Frequently overlooked, this option may be possible if there is a considerable amount of renewable energy already on the grid. This typically happens when a renewable energy quota system has been established by a regulator ensuring that a specific proportion of the energy consumption annually must be renewable. Companies can then take credit for their purchase if the renewable energy quota is supported by a certificate scheme.
This model offers a very cost-efficient option for companies since pressure on utilities to fulfill a renewable energy quota provides a strong incentive for them to offer lower prices. If the penalties for failure to meet quotas are high for utilities, this provides even more pressure, helping to ensure lower prices for renewable energy purchasers. It is worth doing some due diligence and seeing if this option is a possibility for your company.
Renewable Energy Certificates (RECs)
RECs are another renewable energy procurement option for companies. They certify that the bearer owns one MWh of electricity generated from renewable energy. Once the power provider feeds the energy into the grid, the REC received can be unbundled and sold on the open market, enabling them to be sold as a carbon credit to offset emissions.
For companies, the implementation of RECs is easy and cost-effective since there is an overabundance on the market. However, RECs have drawn criticism since a company can buy RECs while continuing to use fossil fuels and claim that its operations are renewable, even though it is not actually reducing its emissions. In essence, the trading of RECs sends only a very blunt market signal, that somewhere at some time a renewable energy project was built.
In order to prevent sending misleading market signals, companies can get specific about the temporal and spatial particulars of the RECs it is buying, however this requires additional planning and resources for its implementation. For instance, companies such as Google are going the extra mile to match clean energy to its load profile, creating a link between the generation and use of every kilowatt-hour wherever possible. One way Google does this is at its data centers, where it shifts non-urgent work to times when renewable energy is at peak generation capacity on the grid that powers it.
How software can help manage and measure the impact of renewable energy procurement
Sustainability reporting requirements continue to evolve and become more detailed and demanding, particularly for firms that report to multiple stakeholders under multiple frameworks. Measuring the impact of renewable energy purchases is particularly complex, especially if a company seeks to take a leading position and send a strong market signal by matching renewable energy to its load profile (making it critical that a solid data foundation is in place).
The GHG Protocol provides Scope 2 guidance for companies that have a reliable system for purchasing renewable electricity. Its market-based emissions method, introduced in 2015, allows firms to take credit for their renewable electricity purchases while avoiding any under/over-reporting. This method instructs companies to apply a zero-emission factor to their renewable energy purchases and contract specific emission factors for PPAs and RECs if they are available. It also empowers organizations to take control of their own electricity fuel type mix and not have to rely on the grid average. IBM Envizi’s software platform supports both the location-based and the market-based emissions calculation method.