The inexorable momentum toward a greener energy paradigm has led to rapid growth in renewable electricity. Originally spurred by governments adopting renewable energy targets along with policies to help meet those goals, we are witnessing a seismic shift whereby corporations themselves are now the main drivers of the green energy transition.
Companies face two primary challenges in meeting their green energy objectives. First, demand for renewable energy is growing faster than additions in renewable energy production, leading to limited renewable energy procurement options in certain markets. Second, corporate decision-makers often are not aware of the renewable energy sourcing options available to them across geographies, leading to sub-optimal procurement decisions in terms of contribution to sustainability objectives, timeline, budget, risk, or quality.
This article provides a simple framework all companies serious about decarbonization should consider, highlighting the most critical trade-offs between renewable electricity sourcing options and the key steps to build an effective renewable electricity procurement portfolio.
When building your sourcing roadmap for reducing carbon emissions related to electricity, it is important to find the optimal mix for each geographical location. The global plan should secure the long-term trajectory with long- and medium-term solutions and bank on quick wins. But above all, act.
Neon Steinecke, Director, Sustainability Solutions at ENGIE Impact
To understand how renewable electricity sourcing fits together with a carbon offsetting strategy, click here.
Understanding the Trade-offs Between RenewableElectricity Sourcing Options
In compliance with typical sustainability frameworks (Greenhouse Gas Protocol, SBTi, RE100, etc.), corporations can choose from four primary contractual options for sourcing renewable electricity. According to the local context, these global sourcing options have different shapes, names and options.
Unbundled Energy Attribute Certificates (EACs) is the generic term for what we usually call RECs (Renewable Energy Certificates, for the USA and Canada) or GOs (Guarantees of Origin, most of Europe). These are instruments for tracking renewable electricity generation. They serve as proof that one unit of renewable electricity (typically 1 MWh) has been injected into the power grid. Acquiring them enables consumers to claim the use of renewable electricity. EACs can be purchased unbundled and independent of existing electricity supply contracts.
Green Retail are bundled contracts for electricity and EACs with a supplier. They allow customers to easily procure renewable electricity by paying a premium through their power supply contract.
Corporate Power Purchase Agreements (PPAs) are contracts for direct offtake of electricity, typically with a developer and a specific installation (alternative models and roles exist). Long-term PPAs enable the construction of new installations through long-term engagement (10-15 years+). Short-term PPAs (1-5 years) are typically used to buy electricity from already-existing installations.
Direct Investment is the most significant engagement within the renewable electricity sphere. Typically, this concerns on-site solar PV installations of smaller size (‘behind-the-meter', i.e., direct use of energy generated without passing through meter). However, companies are increasingly investing in offsite installations (not on the company's premises).
Corporate decision-makers must consider multiple criteria when identifying the right mix of renewable electricity sourcing options. They should use the three criteria listed below to design their mix of renewable electricity sources. The evaluation of the decision criteria usually differs according to the local context:
Feasibility refers to the availability of renewable electricity sourcing options in a geographic region, implementation complexity, and lead time. The feasibility of EACs and green retail is typically high as they are easy to contract and available in most countries. On the other hand, PPAs and direct investments require more resources (capital and time) and are hindered in many geographies by regulatory boundaries.
Quality refers to a solution's additionality, provided through building new installations, temporality, describing the match between the production and consumption curve, and the geographical distance. EACs and green retail usually certify production from existing installations and, consequently, additionality is low. However, if quality requirements are set at the right level, it is possible to build high-quality approaches with both solutions. PPAs and direct investment typically lead to new capacity, which directly impacts the electricity grid. In some cases, they can have lower additionality, building on already existing assets.
Economics refers to the comparative cost of the solution, whether a long-term engagement is required, and the exposure or hedging it can provide against future market developments. Renewable electricity sourcing is a way to source electricity and its renewable attributes. With EACs and green retail, sourcing impacts only the renewable attribute of the electricity and can be purchased for an extra cost. The extra cost is small compared to the electricity cost in most countries. For corporate PPAs and direct investment, the business case concerns both the renewable attribute and the electricity, providing an opportunity for overall savings. The opportunity for savings typically comes at the cost of long-term engagement and a long-term position in the market. Still, buying electricity through long-term solutions could be considered a reasonable risk management strategy, particularly in a fluctuating market, though the business case needs confirmation on a case-by-case basis.
Four Opportunities for Sourcing Renewable Electricity
Based on these decision criteria, sourcing opportunities are identified around the globe. Considering the various trade-offs between the opportunities makes it possible to plot them on a roadmap. Organizations must consider:
Which solutions to prioritize?
Is it better to opt for long-term or short-term solutions? How to find the right balance between the long-term achievement of sustainability targets (at fixed prices) and the financial exposure related to a long-term engagement?
Which geographies to prioritize?
Would it be more advantageous to accelerate the avoidance of CO2 emissions or increase the renewable energy share?
How to achieve the defined sustainability trajectory? Is the optimal solution to launch an on-site solar program or offsite PPA sourcing? Or both? What are the required resources (people, capabilities, cash)? How many projects would it be feasible to launch and monitor centrally?
Building Your RE Procurement Portfolio at Scale
To successfully deliver outcomes on time and on budget, organizations need to address renewable electricity sourcing centrally. Once a small cost factor (below 3% for many industrial companies), the energy procurement category is now moving to center stage as it contributes to the company's global sustainability objectives.
Our three-step approach allows organizations to identify and prioritize sourcing actions, onboard key stakeholders and drive decisions toward implementation—with tangible short-term results and long-term assurance of the decarbonization trajectory. By building a renewable electricity roadmap, companies effectively move toward a centralized approach, accelerating implementation action globally.
1. Clarify Starting Point and Ambition
Identify the target the renewable electricity sourcing should contribute to (e.g., electricity costs, CO2 emissions, SBTi, stand-alone claim on renewable electricity share, etc.) and clarify the link between the emissions reductions target (tons of CO2) and electricity sourcing (MWh).
Collect the emissions and electricity supply baseline and extrapolate by geography through high-level assumptions about energy efficiency improvements and business development.
Depending on the extrapolation, prioritize geographies according to emissions and energy use to decide where an in-depth approach is needed to build the roadmap and prepare for implementation, and where a higher-level approach is sufficient.
2. Build an Actionable Roadmap and Align Stakeholders
Identify available solutions by geography and build preliminary roadmaps at the local level, based on the previously-mentioned decision criteria: feasibility, quality and economics. Then, onboard global and local stakeholders, get buy-in for organizational change, identify potential additional costs, and engage with local entities.
Build the global roadmap by considering trade-offs between the different geographies based on the contribution to the global decarbonization trajectory, the CO2 impact, the required budget, short-term opportunities, long-term security and long-term engagement.
Once the global roadmap is built, and its budget, CO2 and organizational impacts are understood, validate the roadmap through the company’s management to drive implementation. Validation typically concerns the budget, targeted sourcing options and immediate actions.
3. Implement an Action Plan
After establishing the global roadmap, use the momentum created by the management decision to start implementing the strategy immediately. At this point, the company usually enters a new paradigm in energy sourcing: from local execution following global guidelines to a centralized, global programmatic approach.
The centralized approach is required to ensure local actions facilitate the achievement of an organization’s sustainability ambitions. New capabilities must be developed around procurement, program management and hybrid teams, mixed with global and local profiles with technical and management skills to serve this need.
The implementation and operational phases go hand in hand. As the first projects come to life and their performance is monitored, new projects along the roadmap need to be implemented. The roadmap should be updated along with the realized actions and the changing energy landscape.
ENGIE Impact’s 2020 survey of 200 global executives reveals a notable trend: even as sustainability becomes an increasingly strategic priority for business, only 30% of organizations believe their sustainability efforts have been successful. Increase the odds of success by leveraging the approaches outlined in this article.
Charting Your Transformation Journey To Net Zero Carbon
Achieving Net Zero will not be easy. To keep pace with these ambitious goals, leaders should map their journey through the lens of three foundational dimensions of transformation: scales, levers and enablers.