The ABCs of Energy for Your ESG Goals: Part 2
- Mar 22, 2022 12:08 pm GMT
In the first part of our discussion of numerous terms relating to Environmental, Social, and Governance (ESG) goals, we looked at the high-level concepts and terms related to corporate and institutional behavior and environmental behavior. Those terms set the table and help define the overall strategy. That’s where one needs to begin. But then there’s the question of setting the framework for what we do, particularly as it relates to the environment and emissions-related goals. It’s one thing, for example, to commit to ESG goals and being carbon neutral (resulting in no net addition of carbon dioxide to the atmosphere), but then the question is how? And what are the tools and the metrics that apply to that activity?
This week, we will take on those energy-related terms and definitions that govern the activities and strategies that corporations must undertake to become more environmentally sustainable.
Categories of emissions reduction:
Several weeks ago, in our post “Putting the E in ESG,” we discussed the concept of “Science-Based Targets” that are being adopted globally by thousands of organizations committed to reducing their greenhouse gas emissions. To refresh the memory, those are the measurable goals necessary for each organization’s activities to align with the 2015 Paris Agreement that aims to hold global temperature increases to 2 °C by the year 2100.
Within that framework, three separate “scopes” relating to energy use were established.
Scope 1 – These are emissions are those directly created by one’s operations (like smokestack emissions and vehicle fleets).
Scope 2 – These are emissions that emanate from an organization’s electricity and steam consumption.
Scope 3 – This encapsulates all upstream and downstream emissions. Upstream, they relate to emissions from supply chain activities. Downstream, they cover all use and disposal of products produced by a corporation.
Scopes 1, 2, and 3
Hard-to-Abate - The Scope 1 concept of direct emissions is not overly complex and doesn’t generally involve a lot of industry jargon. However, there is one phrase – “hard-to-abate” that is commonly used and worth describing. This refers to emissions that are difficult to tackle. These typically come from heavy industry as well as trucking, shipping, and aviation, currently comprise about 30% of total global greenhouse gas emissions and are likely to grow in future importance. These hard-to-abate emissions are more difficult to address than some others (such as electricity use), and the technologies involved are generally more costly and less well-developed at a commercial scale (for example the application of hydrogen to cut carbon emissions in the steel industry). In recent years, we have seen a growing level of activity in this area.
A large portion of today’s decarbonization efforts, though, relate to Scope 2 emissions from electricity and steam use. In this area, several concepts deserve exploration.
Terminology related to Scope 2 activities:
To reduce associated Scope 2 emissions (and almost all of this is focused on electricity since it represents the lion’s share of the problem), organizations are increasingly resorting to different approaches to decarbonize their electricity use. In that category, there is an entire taxonomy related to renewable energy purchases. Let’s start with the definition of renewable energy itself, and the resources that may (or may not) neatly fit within that category.
Renewable Energy – The U.S. Environmental Protection Agency (EPA) defines renewable energy as “electricity generated by fuel sources that restore themselves over a short period and do not diminish.” The EPA also notes that although some renewable energy technologies “may have an impact on the environment, renewables are considered environmentally preferable to conventional sources.” Not all renewables are entirely environmentally benign. Some, such as large hydro, may have enormous environmental drawbacks. To take one example, while hydropower on the Columbia River is a significant carbon-free resource, it has also seriously threatened once previously robust salmon runs. For that reason, many renewables programs – including that promoted by the EPA, avoid large hydro.
Green Power – The EPA defines a subset of renewable energy as “green power.” These power resources include:
Wind and Solar Power – Wind and solar resources generate electricity created by tapping into wind currents or the energy generated by the sun and are the two largest renewable resources currently being developed. There are technological variants here, especially in solar energy, and we’ll discuss these technologies in greater detail in future posts.
Geothermal – Geothermal energy is provided by heat from the earth. This can take multiple forms using various technologies, an area we will also explore soon.
Landfill Gas – Landfill gas is methane that is captured in landfills from rotting organic waste, purified, and used directly as fuel, including as an input to electricity generation.
Biomass – Biomass energy is electricity or heat generated by processing and burning various organic materials such as construction waste, agricultural residue, specially grown crops, and trees.
Low-Impact Hydropower – Low impact hydropower is defined as electricity generated by hydro facilities that have minimal impact on the surrounding environment. The Low Impact Hydro Institute certifies such facilities after they meet several criteria, including those related to flow regimes, fish passage, and shoreline protection.
Renewable Portfolio Standard – Renewable Portfolio Standards (RPS – which are typically instituted at the state level) require utilities or electricity suppliers to include minimum percentages of renewable energy in the mix of electricity delivered to customers as of specific dates. State RPS programs vary widely, both in terms of percentages, enforcement, and qualifying resources. Some states, such as California and Hawaii, have very aggressive RPS goals, with those two states targeting 100% by 2045. The map below illustrates the current state of play with RPS requirements across the United States.
State Level RPS Targets (2021)
Additionality – Additionality is the critical concept that a project would not have been built under a “business as usual scenario.” That is, without the specific action of the related participants, no change would have taken place. For example, if a party commits to buying energy from a new wind farm, and that commitment allows the developer in turn to obtain financing and develop the project, additionality applies. By contrast, if the buyer commits to taking energy from a wind facility that has already existed for years, no additionality can be claimed.
Renewable Energy Certificates - A renewable energy certificate (REC) is a tradable market instrument equal to 1 megawatt-hour (MWh) of electricity from a renewable energy resource. RECs are critical to the tracking of clean energy generation in the power grid and are verified by third parties. They include the underlying related generation asset, the location of that asset, any environmental emissions, and the year of generation (vintage”).
Bundled Renewable Energy Credits – Bundled RECs are those renewable energy certificates that are tied to a specific project. The purchaser typically pays a separate price for these RECs, and then “retires” them so that they are no longer tradable in the market. If the buyer retires RECs from a new project for which it is a prime mover, it can claim additionality. However, if a renewable energy purchaser buys electricity from a renewable resource and sells those RECs to a third party, it can longer claim a renewable electricity purchase or additionality. At that point, the buyer is essentially purchasing “system power,” (generically supplied electricity from the grid) with the average carbon intensity of all generating resources.
Unbundled Renewable Energy Credits – Unbundled RECs are renewable energy credits that have been carved off from a specific renewable generating asset and sold separately to a purchaser that wishes to offset its electricity consumption more generically. These tend to be available on the market at lower prices, but with unbundled RECs, the purchaser can claim neither resource-specific attributes nor additionality.
Power Purchase Agreement – A power purchase agreement (or PPA) is a buyer’s commitment to purchase energy and associated RECs from a generating resource for a specific duration. PPAs are typically for 10 – 20 years and specify start and end dates, payment terms, power delivery locations, and penalties for underperformance. Physical - or Direct – PPAs involve the buyer taking title to the actual energy at a pre-determined price and having it delivered to a specified location (both the resource and the customer must be located within the same market).
Virtual Power Purchase Agreement – a virtual power purchase agreement (or VPPA) is similar to a PPA in its specification of a specific buyer and asset, purchase of RECs, as well as an agreed-upon price for energy. However, in this instance, the energy is not delivered into the same power grid and the transaction is merely financial, involving a contract-for differences arrangement. The buyer still receives electricity from its normal channels but also enters into a separate financial agreement with a renewable asset owner. This transaction is relatively complex, with several critical nuances, so we intend to cover this in a separate post in future weeks.
The complexity involved in a VPPA
Green Tariff – Utilities have recently been serving customers with carbon reduction targets by offering green tariffs. These tariffs help customers access clean power by tying a defined tariff to a designated renewable asset (or bundle of assets) and associated RECs. Such tariffs aid customers in vertically integrated utilities (where utilities still own generation assets, as compared to competitive power markets where generation is owned by non-utility third parties) to meet their carbon reduction goals.
We think you’ll agree that all of this is pretty complicated stuff, involving a large number of complex concepts and terminology. many of these topics involve a high degree of nuance, much of which we will explore in future posts, as we help you navigate this thicket of complexity so that you can work on developing your strategies.
- Determine where you are in your Scope 2 electricity decarbonization goals
- Understand what options may be available to your facilities, whether they are PPAs, VPPAs, or green tariffs.
If there are terms that are critically important that you think we’ve missed in our last two posts covering these topics, please let us know!
Matt Ward and Joyce Bone – Founders, SolMicroGrid
#ESG #environment #carbon #sustainability #emissions #climate #socialresponsibility #netzero #carbonneutral #renewables #PPAs
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