Green tariffs (Part 2 of 2): Accounting for green tariffs
Seedling explainers

Green tariffs (Part 2 of 2): Accounting for green tariffs

Switching to a green tariff will reduce my Scope 2 footprint…right? As the green energy market evolves, so does carbon accounting. Read our explainer to find out more.

Green tariffs are an increasingly popular choice for businesses looking to reduce their emissions on the path to Net Zero. This is particularly true for SMEs that, having exhausted energy efficiency measures, find on-site installations (e.g. solar panels) or power purchase agreements (PPAs) with renewable generators are out of reach. However, as we discussed in Part 1, not all green tariffs are created equal, with energy consumers unwittingly purchasing products with dubious green credentials.

Add to this the fact that all businesses deriving electricity from the grid in practise consume the same electricity generated by the same mix of fuels (the aggregate grid-mix of renewables, nuclear and fossil fuels) regardless of tariff, and you start to realise that it isn’t as straight forward as eliminating your purchased-electricity footprint because you’ve switched to a green tariff.

Why account for electricity-related emissions in the first place?

As a reminder, the GHG Protocol’s Corporate Standard is the leading carbon accounting framework for businesses. The standard aims to enable accurate and consistent emissions reporting globally. Under the framework, businesses must report emissions that occur because of the electricity they consume as Scope 2. To do so recognises that whilst GHGs are not produced directly on site by the business (rather at the power plant) they occur because of a company’s activities and decision making and so it is within their power to reduce them. Businesses can influence electricity-related emissions by reducing their overall demand (e.g. through energy efficiency measures) or by switching to low-carbon energy sources. The aim is that by measuring their Scope 2 footprint, companies can track the effectiveness of these emissions reduction strategies.

So, what is the official guidance on accounting for electricity-related emissions?

In 2015, the GHG Protocol updated its Scope 2 Guidance to address the growth of renewable energy. The revision introduced ‘dual reporting’, whereby businesses account for Scope 2 emissions using two approaches, each with its benefits and challenges:

‘Location-based’ (MWhs of consumption x grid emissions factor)

This approach reflects the average emissions intensity of the local grid on which the energy use occurs, not the chosen tariff. The location-based method is a more accessible calculation as it doesn’t rely on supplier specific data, the quality of which varies significantly between geographies. It therefore helps facilitate globally standardised reporting. Another benefit is that it reflects emissions from the energy physically used by grid consumers, since all are connected to the same undifferentiable supply regardless of tariff. Your tariff governs what type of energy your supplier adds to the overall grid system – not the energy you actually receive.

However, the obvious and key disadvantage of the location-based method is that green tariff customers are not ‘rewarded’ for demanding greener energy by a reduction in their footprint. Unless an organisation can meet their entire electricity demand from onsite self-generation (an unachievable route for most SMEs) it is difficult for them to achieve Net Zero without significant decarbonisation of the grid.

‘Market-based’ (MWhs of consumption x contract / supplier-specific emissions factor)

The market-based method was introduced in the 2015 updated guidance to take your specific energy purchases into account. The calculation reflects the energy mix that your supplier purchases and puts into the grid on your behalf. It effectively gives credit to businesses for using their purchasing power to accelerate the deployment of renewable energy. It incentivises action.

However, the market-based method also has its setbacks. First, it’s hindered by the poor data quality that characterises the nascent renewable energy sector. Not all energy suppliers globally make available contract-specific emissions factors, and those that do publish factors do not necessarily adopt uniform or even transparent calculation methods. This can lead to a lack of standardised reporting.

Secondly, as discussed in detail in Part 1, not all green tariffs deliver the same impact for the planet. To combat this, the GHG Protocol sets out quality criteria that a green tariff must meet for a market-based number to be presented. These criteria include ensuring that renewable energy purchases made by your supplier aren’t outdated (specifically that the renewable energy guarantees of origin certificates or REGOs that serve as proof of a renewable energy purchase are redeemed by the supplier with OFGEM ‘as close as possible’ to the time the energy is consumed) and that the energy is sourced in the same market as that in which the energy consumption occurs. However, many argue that these ‘quality’ features are vague and difficult to verify. They are also potentially incomplete – for instance, the GHG Protocol does not require the green tariff purchase to provide additionality; in other words, the switch to a green tariff does not need to lead to spend on renewable energy infrastructure than would not have occurred otherwise.

And if the supplier-specific factor isn’t available or fails to meet quality criteria? The market-based number must then be reported according to a ‘residual-mix’ emissions factor. This is the average emissions intensity of the national / regional grid, stripped of all ‘claimed’ energy. It is essentially the location-based method minus green energy attributes, and so will have a higher emissions intensity than the grid-average. So, in the absence of PPAs backed by certificates or a supplier-specific emissions factor for a high-quality green tariff, your market-based figure will be worse than your location-based figure.

The market-based method is a live topic. The GHG Protocol secretariat is analysing feedback on its Scope 2 guidance from a broad range of stakeholders to drive further improvements to combat the drawbacks we've discussed.

Our approach at Seedling…

At Seedling, we enable you to report both a location-based and market-based Scope 2 footprint in compliance with the GHG Protocol dual reporting framework. Our emphasis is on transparency – we help you to clearly convey the basis of every calculation. We work with you to translate information from your energy supplier into your market-based figure and back this number up with qualitative colour around the nature of your electricity purchases to build stakeholder confidence in your climate communications.

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