Net Zero Initiative for Energy

Executive summary

Since its creation, the Net Zero Initiative has aimed to support companies in their contribution to collective carbon neutrality in an ambitious way that is compatible with climate science. 

To achieve this, the initiative aims to structure the framework for climate measurement, targeting and action around three distinct pillars: induced emissions (pillar A), avoided emissions (pillar B), and sequestered emissions (pillar C). The electricity sector plays a key role in the overall decarbonization of energy, and of many sectors that depend on it, such as industry and transportation. Furthermore, companies are expected to demonstrate their ability to reduce the electricity emissions on which they depend, which are usually accounted in the scope 2 of their carbon footprint. 

This report is a guidance about the accounting for renewable electricity purchases in NZI Pillars A and B. This report is divided in two parts:

• Part 1: LOW CARBON ELECTRICITY MARKET AND CARBON ACCOUNTABILITY SYSTEMS
• Part 2: RECOMMENDATIONS FOR CHANGES IN ACCOUNTING RULES

PART 1 - LOW CARBON ELECTRICITY MARKET AND CARBON ACCOUNTABILITY SYSTEMS

Electricity markets and procurement contracts

Many electricity procurement contract systems have been developed around the world in recent years so that companies can ‘choose’ the type of electricity they buy. Given that electricity networks are connected at regional or national level, it is rare for these procurement contracts to reflect a physical link between producer and consumer. 

In particular, studies on the impact of Guarantees of Origin (GO) on electricity markets indicate that without hourly matching^[1], their impact is very low, if not negligible^[2], and monitoring data to follow temporal coherence is generally insufficient.  What's more, GOs make little contribution to financing new renewable energy infrastructure. In 2022, the average price of a GO in France was €4.1/MWh^[3], compared to €63/MWh^[4] for the cost of producing additional renewable electricity (mainly ground-mounted solar PV and onshore wind).

Limits of existing accounting for renewable electricity purchases

Market-based accounting makes it possible to use the emission factors of the renewable electricity purchased with a certificate, without systematic effect on the decarbonization of the electricity consumed.  For example, under the current European system, a German organization that consumes electricity on a winter's night can claim for ‘renewable electricity’ and emission reductions in market-based, thanks to Guarantees of Origin issued from photovoltaic production on a summer's day in Spain. 

This spatial and temporal inconsistency is not only likely to slow down the real decarbonization of electricity (in Germany in the former example), it is also misleading information for buyers about the nature of the electricity consumed. What's more, this mechanism masks the necessary efforts to make the electricity network more flexible (storage capacity, adaptation of demand) linked to the development of intermittent renewable energies^[5]. Figure 1 below illustrates that difference between the physical connection of an organization connected to a grid powered with renewable and non-renewable electricity, and the financial connection to the wholesale market with renewable certificates from all over Europe. 

At European level, the market is flooded with low-cost Guarantees of Origin where renewable electricity production is easy and substantial (solar energy in Spain or hydroelectric power in Norway, for example). However, the players present in these countries are also likely to claim low-carbon electricity for this same production because of the physical connection that links them to these capacities, making preferential use of location-based accounting, leading to the risk of double-counting.
 

Needs for new methods and criteria in accounting rules

In this context, this guide focuses on the following questions: under which conditions does an electricity procurement contract really help to decarbonize the electricity on which an organization depends? Can current carbon accounting reflect this? If not, how could it evolve to do so?

This guide focuses on the main types of renewable electricity contract that exist but does not cover Guarantees of Origin or any other certificates for non-renewable electricity. These are however an interesting evolution of certificate markets, and their impact on emissions accounting could be developed at a later stage. This document presents methodological proposals for the accounting associated with these contracts within the NZI framework. These proposals aim to reflect the real impact of these different energy procurement contracts in terms of induced emissions (pillar A) and avoided emissions (pillar B). In fact, these types of electricity procurement contracts encompass different realities with a highly variable impact on the decarbonization of electricity, which current carbon accounting does not capture. 

PART 2 - RECOMMENDATIONS FOR CHANGES IN ACCOUNTING RULES

New carbon accounting criteria are therefore being introduced to encourage economic players to favor the most virtuous contracts in terms of electricity decarbonization. Through this document and these recommendations, the NZI framework aims to contribute to the ongoing work of the GHG Protocol for its Corporate Standard, with a rigorous and ambitious accounting of renewable energy purchases, likely to accelerate the electricity sector’s decarbonization.

Criteria for spatio-temporal consistency

This guide therefore proposes ambitious criteria for spatio-temporal consistency between electricity production and consumption, to stimulate the electricity market towards greater transparency and better spatio-temporal consistency of electricity purchases. This guide’s key proposals are related to market-based accounting of GOs and Purchased Power Agreements for Pillar A:

1. Spatial coherence: the buyer’s facilities and the renewable installation must be on a connected network and limited to bordering countries/states or province. This condition reflects the fact that, despite interconnections between grids of various countries, states, or provinces, the amount of electricity transferring from one grid to another is often limited, particularly when the grids are not adjacent to each other. The development of electricity interconnections is one of the European Union's energy priorities, but requires major infrastructure. The interconnection capacity target for each country (with its bordering countries) has been set at 10% of its installed capacity in 2020 and 15% in 2030^[6], a long way from an electricity network where electrons would cross the continent as easily as on the market.
2. Temporal coherence: the consumption must take place within 30 days of GO production time (monthly matching) and emissions reduction accounting depends on the level of temporal coherence:
   • 100% of emission reductions can be accounted for with hourly matching.
   • 50% of emission reductions can be accounted for with daily matching.
   • 25% of emission reductions can be accounted for with monthly matching.
   • No reductions can be accounted for if coherence greater than one month.

Transparency and precise tracking of electricity markets

Some of these conditions, particularly hourly temporal alignment between electricity consumption and the issuance of renewable certificates (referred to as temporal coherence in this guide), pose technical challenges to Pillar A emissions reduction, given that energy markets may not currently facilitate precise tracking. 

Ultimately, strict hourly matching conditions should be established for accounting GOs in a few years’ time. However, daily and monthly matching may temporally account for a partial reduction in emissions related to electricity consumption. These lenient conditions remain purposely ambitious, as stringent guidelines should drive rapid evolution within markets and organizations.

This transitional phase has been designed to encourage players to improve their temporal consistency, until conditions allow for more feasible hourly matching. In addition, the proposed accounting rules are intended to support ongoing initiatives to develop information systems at the required level of granularity. Moreover, the development of an accurate and harmonized tracking system of the residual mix emission factor is also crucial to make market-based accounting reliable and an incentive for decarbonization. 

Regardless of the methodology adopted by an organization for energy-related emissions accounting, it is necessary to transparently report the spatial and temporal coherence of the renewable certificates cancelled by organizations against their consumption. 

In terms of avoided emissions for Pillar B, energy certificates that have not been used to reduce Pillar A (induced emissions) can be used to claim avoided emissions (Pillar B - category B3). In line with NZI guidelines, this guide suggests that avoided emissions should be calculated in relation to the country's average EF, and in proportion to the financial contribution. As with all avoided emissions, if a more specific counterfactual scenario can be proposed, the purchaser is encouraged to do so.