Let’s start with the good news. A lot of companies are committing to decarbonization; in fact, over 1,000 companies across a range of sectors have pledged some kind of emissions reduction or climate neutrality goal. Very naturally, the ways in which corporations account for carbon dictate the ways they procure energy, which in turn dictates their procurement strategy.
But as a recent International Energy Agency analysis showed, the annual matching methodology – which guides companies to apply an emissions factor of zero to their electricity usage by matching their demand with the purchase of generation on an annual basis – is failing to provide the depth of data or strategy needed to ensure renewable energy purchasing is driving actual decarbonization of electric grids.
Further down the decarbonization spectrum, companies like Google at the vanguard of decarbonization are working to make the case that 24/7 carbon-free energy is the primary goal companies should be reaching for.
In its report, the IEA recommends a middle ground between the two schools of thought, as well as a range of ways goal-setting, strategy and measurement need to change to ensure the outcomes companies need to reach their net zero or clean energy adoption targets. To understand the challenges this presents for broader grid decarbonization, let’s dig into the report.
RECs dominate historic purchase behavior
Annual electricity matching has been the default accounting methodology over the last decades. Under Mmarket-b Based carbon aAccounting principles for Scope 2 emissions outlined in the GHG Protocol, companies can tally up their electricity consumption and purchase the equivalent number of RECs to zero out their emissions for the year. This behavior has served the important purpose of bringing new Renewable generators onto the grid. In fact, RECs retain the highest share of total clean electricity sales, representing 45% of sales in 2020.
The issue is that annual matching relies on averaging out data throughout the year, which inherently glosses over how the carbon impacts of electricity generation and consumption change within the year, the month, the day, even the hour. While annual matching can have a large emissions reduction in the system, it can also fall far below what companies hope or expect.
Risks with annual accounting
There are a number of potential issues that arise when decarbonization is only measured on an annual basis.
First, you can end up oversupplying renewables in certain hours. When wind and solar are plentiful, adding additional generators onto a grid that’s already 100% covered on an hourly basis doesn’t lead to an actual reduction in emissions. In a worst case scenario, renewable energy plants may be ordered by grid operators to curtail production to avoid oversupplying the grid. In other words, those new projects do not provide additionality benefits.
When you don’t examine the hourly impact of generation, you don’t have detailed enough data to understand when to add energy storage and demand response or how much is needed of each – and where new technology developments are needed, such as long duration or seasonal energy storage. On the other hand, hourly matching goals can lead to a more diverse technology portfolio including a more optimized mix of clean dispatchable generation and storage.
Additionally, annual carbon accounting does not account for the impact a change in load or generation has on the system. For example, if a load goes up by 10%, you have to look at what marginal generator comes onto the grid to fill that need. The result of the increased emissions would be for that generator – which could be increased coal or natural gas output – not the grid average, which represents a blended figure of all generation resources.
The IEA’s recommendation? To rework market based accounting to reflect hourly emissions factors to capture the nuances needed to continue driving progress in these key areas.
Impacting emissions reduction outcomes
Which decarbonization goal a company sets not only impacts renewable energy procurement methods chosen, but they also influence the emission reduction outcomes.
To maximize corporate impact, the IEA suggests setting goals using intermediate points along the journey such as:
- Daily, weekly, or monthly matching
- Hourly approach but with tolerance for deviation from perfect balancing (which is complicated and requires explicit evaluation of emissions impact.)
- Targeting CFE 90 – or 90% load matching. For example, it could be that 80% of the time you are load matched and for the remaining time you take the grid mix. If that grid mix was 50% renewables, you’d get to a score of 90 CFE.
As power systems move into higher levels of renewable integration, having greater access to data and more finely tuned goals will ensure renewable energy additions are having the desired decarbonizing effect on those respective electricity grids..
Three critical elements for corporates: goals, data, proof
Signify intent with goals
Annual matching does not accurately capture the emissions impact of clean energy procurement. Setting goals that reflect time, location, and emissionality of investments will send necessary signals to the market, and ultimately affect the emissions reduction outcomes you are able to achieve. Companies starting to these types of shift include beverage giant AB InBev, automakers like Ford and General Motors, and diversified media companies like Comcast.
While setting bold goals like 100% CFE are both admirable and encourage marketwide shifts towards clean energy, there is a range of goal-setting options between 100% CFE and annual matching companies can consider for flexibility. The IEA authors found in their analysis that intermediate goals such as monthly matching or CFE90 can lead to increased investment in dispatchable technologies (like demand response and storage) and be more cost effective than 100% CFE goals.
Additionally, setting more specific goals, can encourage more marketwide adoption of a wider portfolio of flexible technologies required for the transition towards a net zero power sector.
Quality and completeness of data is paramount
For companies who don’t know where to start, data is a logical first step. In order to assess where you are along the journey, understanding your emissions on a more granular level can help you assess what types of goals would be most effective and achievable.
However, this will require an ecosystem to enable. It is essential for governmental bodies, regulators, system operators and utilities to set up clear reporting requirements and effective reporting tools. Key information – such as the generation mix over time, profile of distributed generation, locational and time attributes of EACs, and any grid issues – should be available to all power sector stakeholders to inform their planning and investments.
Emissions tracking and reporting need to be improved
The current method of annual market based accounting has been fit for the purpose of incentivizing the development of more renewables onto the grid. However, as power systems move towards greater levels of decarbonization, the methodology falls short.
At the same time, adopting a strict 24/7 CFE approach at the individual company level can lead to inefficient investment, so strategies need to balance the interaction with the rest of the grid.
Enhancing emissions accounting and reporting can give light to opportunities to improve procurement practices and associated decarbonization outcomes. Utilizing tools like the marginal impact methodology, accounting for the time and location of projects, and working towards more intermediate goals can go a long way towards not only driving true impacts for companies and grids alike, but also towards protecting your firm’s reputation.