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Green power claims: why “contractual ownership” matters

Companies are increasingly looking to reduce their climate impact by purchasing carbon-free electricity. They are, also increasingly, making related claims to shareholders and wider stakeholders about the reduction of their environmental impact from their power consumption. But, as we have discussed before, these claims often don’t stand up to scrutiny, raising accusations of greenwashing and even risking potential litigation.

For corporate buyers of green power in the UK – and in most developed countries – there are essentially two parallel but distinct markets: one market for the electrons that meet the buyer’s power demand and underpin the calculation of carbon emissions in their electricity supply; and another for the environmental attributes that the buyer has contracted to receive.

Understanding how those two markets work and interact is important to inform the claims that a corporate buyer can make about the environmental impact of its power consumption. It’s also changing the way many corporate buyers approach their green power purchasing strategies.

Understanding the electrons

When a corporate buys power from the wholesale market via their supplier, there is no way of knowing which electricity generator created those electrons. All generators feed the electricity they produce into the grid; the suppliers then ensure that their customers – the end-consumers – receive the electrons needed to meet their supply needs.

The UK electricity market used to be known as the Pool, and that provides a useful analogy: as generators supply electrons into the pool, they are mixed, like water, with those of all other generators. As suppliers source power to meet their customers’ demand, they extract electrons from that common pool.

This means that the consumer has no idea whether the electrons it has bought and consumed were produced by a nuclear power plant, an offshore wind farm, a gas-fired generator or (as is now increasingly unlikely on the fast-decarbonising UK grid) a power plant burning coal.

The important point to note here is the difference between hedging and compliance. When a corporate buys power via their supplier, they are fixing the price (hedging) – they are not addressing a compliance obligation.

Grid average emissions

What does this mean for a corporate buyer and the environmental attributes of the power that’s been bought? In terms of measuring the carbon footprint of its purchased electricity (Scope 2 emissions, in the jargon), emissions are determined by the overall generation mix on the grid at any given time.

So, if the grid’s generation is 60% from fossil fuels and 40% from renewables, then the electricity consumed by all end users on that grid would have an average carbon footprint reflecting that 60/40 fossil/renewable split.

Critically, it makes no difference whether the corporate buyer purchases its power from a utility which has a large nuclear fleet, such as EDF, or one that has a large renewables portfolio like Statkraft, or an energy supplier with lots of gas, such as SSE. All the electricity they generate is spilled into the physical power market and, under a standard supply arrangement, the electrons can’t be traced back to the specific generator.

Where does the green-ness go?

There is another market that captures the green attributes of power generated in the UK and which allows for those attributes to be traded – generally referred to as Energy Attribute Certificates or EACs. Every qualifying renewable electricity generator in the UK receives on a monthly basis one Renewable Energy Guarantee of Origin (REGO) from Ofgem for each megawatt hour (MWh) of power it generates.

Because these REGOs are transferable, suppliers can combine fossil fuel-generated power with REGOs to classify it as green. This provides evidence to the consumer of that power that they own the environmental attributes of one MWh of green power that was supplied, at some point during a specific month, to the grid; however, they are not actually consuming that green power, but are instead consuming power drawn from the pool, with its associated grid-average emissions. These transactions are typically short term and often use REGOs sourced from projects that have been operating for many years, or are underpinned by Contracts for Difference: that means that REGO’s arguably do very little to expand the amount of clean energy on the system.

The only way for a consumer to truly access electricity with a different carbon content would be to enter into a corporate power purchase agreement to “contractually” source power from renewable energy generation. Where companies directly contract with renewable energy projects to procure carbon free electricity (CFE), they significantly reduce the carbon footprint of their electricity supply compared to just using grid-supplied power.

There is a further challenge for companies who want to demonstrate that they are, genuinely, consuming 100% carbon-free electricity. Because REGOs are not time-stamped to match the half-hourly generation periods in the physical power markets, consumers cannot rely upon them to show that they were consuming green power at a specific point in time.

To demonstrate progress towards 24/7 carbon-free electricity consumption, a company would need to contract with a portfolio of assets to ensure that sufficient carbon-free power is always being generated to meet its demand during any single half-hour period. Through such an arrangement, the consumer has contractual ownership of the green electrons, underpinned by a power purchase agreement (PPA), and the generation data of the renewable assets in the portfolio at a half hourly level; this generation can then be combined with REGOs at a MWh granularity for ‘official’ compliance. Over time, it’s expected that REGOs will move to temporal matching, meaning they will function more like wholesale electricity markets, and it will be possible to trade each hourly REGO.

Aurora Energy Research has published a report focusing on the EACs market that estimates that the transition to hourly EACs could boost revenues for renewable energy assets by at least 33%.

What tribe are you in?

It’s essential for all businesses to have a clear position on what they believe is the right approach to buying and using clean energy.

Are you in the traditional renewable energy accounting tribe, where annual megawatt-hour matching using REGOs is sufficient, or are you in the direct purchasing tribe, where you source your own power under corporate PPAs and top up using grid average power? Or are you in the 24/7 hourly matching of consumption and clean energy generation tribe? You might even create your own tribe, where you eschew REGOs in favour of direct purchases of green electrons under a corporate PPA.

Whatever you decide it’s worth noting the coming changes in the Greenhouse Gas Protocol Standards that are expected to be finalised in 2025. These are likely to create new guardrails for how companies report emissions, and what information they must provide to guarantee claims of 100% carbon-free or clean energy.