RECs are widely accepted as instruments to manage and offset energy emissions from fossil fuel sources, or Scope 2 emissions as defined by the Greenhouse Gas Protocol. However, there are some limitations in the guidelines that inhibit the maximisation of their impact towards the global energy transition, particularly in emerging markets. In addition, their utility to address and manage Scope 3 emissions is a topic that is increasingly gaining traction.
Instruments To Fund The Energy Transition
It is widely known that emissions from the energy sector make up the majority of GHG emissions globally, roughly accounting for 75% of all emissions. Therefore, transitioning should be made the top priority for corporations given the impact the energy transition can have on reducing emissions and reaching net-zero goals.
Transitioning can be cumbersome, and should companies not be able to source or generate clean energy directly on- or off-grid, renewable sourcing strategies should encompass alternative methods such as PPAs, VPPAs, or RECs, to claim 100% clean energy use.
Impact vs Carbon Credits
As much as carbon removal, together with the energy transition, is a key climate solution to reach net-zero emissions goals, they suffer from the additionality, transparency and MRV issues that are currently being addressed on a wide scale.
RECs arguably bypass those issues by definition, in the following ways:
- They are pegged and issued 1:1 to a MWh produced by a project, which can be measured through reliable and transparent means - manually through meter readings, and automated by SCADA systems - leaving little space for double counting or data tampering.
- Through the technology available, tracking and monitoring of REC transactions is now fully transparent, from issuance to receiving of funds by the project, and can be made publicly available for auditors to verify any claims made.
- In terms of MRV and impact claims this eliminates uncertainty versus the impact of a carbon removal project, given the manual steps needed for audits or high technology costs such as satellite imagery. RECs are tied to audited and verified clean energy projects around the world that have to comply with national and global regulations. This gives a foundational layer of credibility and certification to RECs as offset instruments.
Additionality of RECs
Whilst the GHG Protocol framework does not require additionality for RECs as with Carbon Credits, IRENA defines a renewable energy project to be additional if: “The net incremental renewable capacity deployed or renewable energy generated as a direct result of corporate sourcing of renewable energy is beyond what would occur in its absence."
In Reneum’s case, digital RECs exists to support the accelerated deployment of additional renewable energy projects that would not otherwise happen. At the project level, however, there is no requirement for projects looking to receive funds through these digital RECs to demonstrate additionality explicitly. This is because:
- Renewable energy deployment is still far short of its potential and the levels required — 60% by 2030 — to meet agreed GHG emissions reduction targets.
- Renewable energy projects are still disadvantaged with respect to fossil fuel alternatives in many countries with fossil fuel subsidies deeply embedded in public spending budgets.
- In almost all cases, digital RECs will be issued in countries that do not have compliance energy greening targets for producers, suppliers or consumers, thus providing additional revenue that would not have otherwise existed.
- Achievement of the climate targets that countries set out in their Nationally Determined Contributions (NDCs) under the Paris Agreement often depends on external finance to deliver the investment roadmaps desired. Digital RECs are intended to increase a project’s revenue stream which will in consequence increase its bankability and hence attract finance. The renewable energy community in most countries still has no other means to bring their non-power attributes to market.
Geographic Impact Limitations of GHG Scope 2 Guidelines
The Greenhouse Gas (GHG) Protocol guidelines, that recommend best practices for REC purchases and Scope 2 reporting, do come with their limitations. As guidelines, not laws, these have not necessarily been kept up to date with the current needs of the global energy transition.
The GHG Protocol Scope 2 guidelines state that RECs should “Be sourced from the same market in which the reporting entity's electricity-consuming operations are located and to which the instrument is applied.”
In major markets such as the USA, EU and China, renewables adoption is significantly more advanced than in emerging markets and developing economies (EMDEs), due access to capital, lower investment grade associated risks, and other factors.
However, these EMDEs make up almost 40% of global energy related CO2 emissions, and will need to more than triple the current annual clean energy investment, from $770 billion in 2022 to $2.8 trillion by the early 2030s, to reach global Net-Zero goals, according to the recent IEA report titled “Scaling Up Private Finance for Clean Energy in Emerging and Developing Economies”.
The case is clear that geographic limits on the procurement of an instrument such as RECs for reporting technicalities, can impede the true impact climate finance should have in accelerating clean energy deployment and investment in EMDEs.
Should a company in Germany voluntarily purchase RECs to fund renewable energy projects in Kenya, given the traceability and impact of RECs as stated above, this should be recognised in corporate sustainability reports.
In addition, HQs of mining, packaging or manufacturing corporations that have significant operations (and subsequently, emissions) in EMDEs, should easily be able to purchase RECs in an efficient way to account for and report on those emissions, which are currently limited by technicalities in accepted reporting guidelines.
RECs for Scope 3
Assuming the solidity of impact and additionality in the points above, RECs can also be used for voluntary offsetting and management of Scope 3 emissions on behalf of suppliers in a value chain. As detailed by the U.S. Environmental Protection Agency (USEPA) in the May 2022 guide "Renewable Electricity Procurement on Behalf of Others: A Corporate Reporting Guide", companies may purchase RECs to account for their suppliers Scope 2 emissions, should the suppliers not be able to procure renewable energy themselves. This is mainly due to the lack of availability in certain markets, or the lack of access to instruments such as RECs.
Perhaps this is not common knowledge for current emissions reporting practices, however it is clear that this method addresses some of the shortcomings stated above regarding GHG Scope 2 guidelines. It potentially allows larger corporations to mamnage and fund renewable energy in underserved markets, perhaps moving the needle in the balance of climate finance towards EMDEs.
This guidance includes the requirement that the renewable electricity be sourced from the same renewable electricity market as the renewable electricity recipient’s operations to which it is applied. This location may be different than the location of the reporting organization purchasing the renewable electricity. - USEPA
The technicalities of how to account for Scope 3 emissions reporting through renewable energy procurement via RECs or PPAs are detailed in USEPA's report. In terms of emissions avoided, through the UNFCCC Grid Emissions Factor Table (latest from 2019), the CO2 emissions avoided per MWh of clean energy produced can be calculated, based on the energy mix of various national grids.
By employing this calculation method, companies can account for, offset and quantify the CO2 emissions avoided of their Scope 3 emissions easily, whilst proving immediate impact towards the energy transition through RECs globally.
In conclusion, it is important to highlight that the choice of how to integrate RECs into a businesses' renewables strategy and emissions reporting is ultimately up to the buyer. Depending on the guidelines chosen to adhere to, or simply wanting to make an impact on renewables globally, we hope the case for using RECs can be taken into consideration as many global standards are coming under scrutiny, and in some cases are being reviewed.
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