Dr Andrea Smith’s thesis, What factors – external and internal – influence a firm’s choice of voluntary greenhouse gas mitigation activities?, investigated the role of renewable electricity contractual instruments (green tariffs, renewable electricity certificates, etc) in businesses’ climate change strategies. In this blog, she explains the backstory to her research and discusses her thesis’s findings based on her work with 11 large UK and German firms.

The targets set by firms in the corporate Hall of Fame

Many of the biggest and the best-known firms across the world have set ambitious targets to tackle climate change – and this means tackling greenhouse gas (GHG) emissions from electricity use which is a significant contributor to most organisations’ carbon footprint. Many big name brands have joined RE100, an organisation that encourages organisations to pledge to using 100% renewable electricity as part of the fight against climate change. Bank of America, Goldman Sachs, Marks & Spencer, Virgin Media, Zurich: the 200-plus companies that have joined RE100 reads like a Who’s Who of the corporate world. The Crown Estate is listed among them too: renewable electricity targets are not limited to the business world.[i]

The electricity through your socket: you don’t get what you pay for

Buying renewable electricity (RE) is not as simple as it may seem. If an organisation has its own on-site wind turbines or solar panels, it is directly consuming RE. If it is taking electricity from the grid, then the origin of the electricity coming through its sockets is determined by whichever methods of electricity generation are sending electricity to the grid.[ii]

An organisation’s GHG emissions from electricity use can be calculated in two ways[iii]:

It can be calculated by finding out which grids it is connected to and the average emissions per unit of electricity on those grids. This is known as the location method because it is the location of the organisation which counts.

There is a second method of estimating emissions. The market-based method bases emissions on the contractual arrangements (known as instruments) an organisation enters for the provision of electricity. The instrument could be a green tariff with an electricity supplier, or a contract directly between the RE generator putting electricity onto the grid and the consumer organisation, or energy attribute certificates.

Energy attribute certificates document that 1 MWh of electricity has been produced by a particular electricity generation method (usually a renewable method). A common European certificate is the Guarantee of Origin. This was created by a European directive in 2001.[iv] The GO – or GoO depending on your sense of humour –  had a troubled upbringing. There was a wrangle at European level over the best means of public support for RE: a European-wide quota system or feed-in tariffs. The quota camp lost but the GO remained in the directive with a vague, residual role as a label of RE[v]. Organisations that want to claim they were using RE buy GOs. Sometimes they are packaged with electricity or they can be stand-alone purchases. Typically, organisations use them to cover part, or even all of their electricity consumption, and then say they have reduced their emissions from electricity use.

So, what’s the problem?

Prima facie, buying GOs is positive course of action. From conversations with firms, I am convinced that some staff apply neoliberal axioms related to supply and demand and genuinely believe that the purchase of energy attribute certificates or green tariffs will incentivise more investment in solar, wind farms and other RE generating capacity. Unfortunately, research on the impact of the GO (and European green tariffs which are usually backed by GOs) does not support this. Supply has consistently exceeded demand, in a large part due to the huge amount of decades-old hydropower. Figure 1 shows how hydropower GOs dominate the market.  Norwegian hydropower pumps out certificates that are exported all over Europe. Evidence suggests that new RE capacity has been driven by financial incentives from public policy that have significantly outweighed the tiny extra income that RE generators make from certificate sales. [vi]

Figure 1: GOs issued over the period 2010-2015 by generation method.

Note: The figure is taken from Dagoumas and Koltsaklis (2017) and is based on data from the Association of Issuing Bodies.

There is considerably less research on the US certificate – the Renewable Energy Certificate. However, what there is  shows that the price of RECs has been too low to make a difference to investment decisions for new wind power.[vii]

These situations create a zero-sum game. Organisations that use RE contractual instruments typically go on to report reduced GHG emissions as a result of their use. The emission rate of the electricity used by everyone else increases commensurately as organisations buying GOs and RECs lay claim to low-carbon electricity on the grid for a small fee. While these organisations typically report their RE use and GHG emissions on their websites and in their Corporate Social Responsibility reports, the emissions of organisations that do not use RE contractual instruments may go unreported or are reported using the location-based method, which means organisations use the same emission rate irrespective of their RE contractual arrangements. The result is no net change in emissions, but the public and politicians are potentially left with the impression that organisations are driving new RE capacity more than they actually are.

Is there a solution?

Some organisations try to address the issue of supply outstripping demand through only buying certificates from RE generation facilities less that a certain number of years old, thereby trying to create scarcity in the market and encourage new supply. Other organisations enter into power purchase agreements (PPAs) directly with RE generators, undertaking to buy a certain quantity of electricity at a certain price for a certain number of years. I expect it may be easier for RE project developers to find finance for new wind and solar farms and other types of RE if they have a guaranteed income from a PPA. However, neither tactic has been investigated by academics.

Would it be better for firms not to use RE contractual instruments?

Dr Matthew Brander, Dr Michael Gillenwater and Dr Francisco Ascui have been among the leading voices calling attention to the problems of the market-based approach as outlined above[viii]. They have also raised the further question of whether use of RE contractual instruments may actually divert organisations from measures that reduce GHG emissions i.e. electricity efficiency. They argue there could be a reduced incentive to cut electricity consumption if there were no reported emissions from electricity. This question was one of two addressed by my PhD thesis.

My thesis looked at the factors influencing the GHG mitigation strategies of 11 large German and UK firms as they evolved typically over more than a decade. I focussed on the interactions between RE contractual instrument use and efficiency improvements in all types of energy use, although the effect on other mitigation measures is assessed. I found that RE contractual instrument use did not always entail any cost for these firms. Even if it did, the cost was small compared to other operating costs. Where there was a cost, a re-allocation of funds to internal mitigating activities e.g. energy efficiency might have only led to small, on-going emission reductions, although if the money had been spent on offsets instead, there would have been substantial, but one-off reductions.

I also found that the use of emission rates based on RE contractual instruments[ix] use had led to a change in focus or a potential change in focus on other GHG mitigation activities in very limited instances. I characterised the circumstances in which I found a change or a reduction in focus on energy efficiency/saving or the potential for this. This outcome depended on the intersection of circumstances (all three were necessary conditions):

1. where a reputation/moral motivation was driving RE contractual instrument use[x];

2. where energy efficiency/saving were not being driven solely or strongly by cost-saving;

3. where staff did not prevent a reduction or change in focus on energy efficiency/saving activities.

I have suggested some simple reporting requirements that could be introduced to prevent this change/reduction in focus from occurring (see this briefing).[xi]

Conclusion

In summary, the use of RE certificates and green tariffs has not been shown to have a positive effect on RE investment. However, if the firms I studied are typical of other organisations, any negative impact on other GHG mitigating activities is very limited. I would prefer that organisations spent any premium that they pay for RE certificates and green tariffs on good quality offsets instead, as they offer more certain benefits. However, offsetting’s poor reputation may make organisations wary, and carbon footprinting rules discourage this course of action.[xii]

A more promising course of action is to steer organisations towards ensuring that their use of RE contractual instruments draws on new investment. PPAs look like the contractual instruments most likely to achieve this as they offer RE generators a guaranteed income usually over several years. This may be especially useful in the era of Covid-19 where public financial support for RE may be diverted to other purposes. However, this needs to be checked by research on the efficacy of PPAs in incentivising extra investment[xiii]. Organisations need to know what characterises an effective PPA or any other RE contractual instrument. We do not have time in the battle against climate change to go down any dead-ends.

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[i] Alarcon, C., and M. Reynolds. 2019. ‘Going 100% Renewable: How Committed Companies Are Demanding a Faster Market Response’. RE100 Annual Report Progress and Insights. http://media.virbcdn.com/files/5c/aa8193f038934840-Dec2019RE100ProgressandInsightsAnnualReport.pdf.

[ii] Monyei, C.G., and K.E.H. Jenkins. 2018. ‘Electrons Have No Identity: Setting Right Misrepresentations in Google and Apple’s Clean Energy Purchasing’. Energy Research & Social Science 46 (December): 48–51. https://doi.org/10.1016/j.erss.2018.06.015.

[iii] Sotos, M. 2015. ‘GHG Protocol Scope 2 Guidance – An Amendment to the GHG Protocol Corporate Standard’. World Resources Institute, Washington D.C., USA. https://wriorg.s3.amazonaws.com/s3fs-public/Scope_2_Guidance_Final.pdf.

[iv] European Parliament and European Council. 2001. Directive 2001/77/EC. http://europa.eu/legislation_summaries/energy/renewable_energy/l27035_en.htm.

[v] Lauber, V., and E. Schenner. 2011. ‘The Struggle over Support Schemes for Renewable Electricity in the European Union: A Discursive Institutionalist Analysis’. Environmental Politics 20 (4): 508–27., Nilsson, M., L. J. Nilsson, and K. Ericsson. 2009. ‘The Rise and Fall of GO Trading in European Renewable Energy Policy: The Role of Advocacy and Policy Framing’. Energy Policy 37 (11): 4454–62. https://doi.org/10.1016/j.enpol.2009.05.065.

[vi] Wüstenhagen, R., and M. Bilharz. 2006. ‘Green Energy Market Development in Germany: Effective Public Policy and Emerging Customer Demand’. Energy Policy 34 (13): 1681–96. https://doi.org/10.1016/j.enpol.2004.07.013.

Markard, J., and B. Truffer. 2006. ‘The Promotional Impacts of Green Power Products on Renewable

Energy Sources: Direct and Indirect Eco-Effects’. Renewable Energy Policies in the European

Union 34 (3): 306–21. https://doi.org/10.1016/j.enpol.2004.08.005.

Raadal, H. L., E. Dotzauer, O. J. Hanssen, and H. P. Kildal. 2012. ‘The Interaction between Electricity

Disclosure and Tradable Green Certificates’. Energy Policy 42 (March): 419–28.

https://doi.org/10.1016/j.enpol.2011.12.006.

Hast, A., S. Syri, J. Jokiniemi, M. Huuskonen, and S. Cross. 2015. ‘Review of Green Electricity Products in the United Kingdom, Germany and Finland’. Renewable and Sustainable Energy Reviews 42:

1370–84.

Hufen, J.A.M. 2017. ‘Cheat Electricity? The Political Economy of Green Electricity Delivery on the Dutch

Market for Households and Small Business’. Sustainability (Switzerland) 9 (16).

doi:10.3390/su9010016

Mulder, M., and S.P.E. Zomer. 2016. ‘Contribution of Green Labels in Electricity Retail Markets to

Fostering Renewable Energy’. Energy Policy 99 (December): 100–109.

https://doi.org/10.1016/j.enpol.2016.09.040.

Dagoumas, A.S., and N.E. Koltsaklis. 2017. ‘Price Signal of Tradable Guarantees of Origin for Hedging Risk of Renewable Energy Sources Investments’. International Journal of Energy Economics and Policy 7 (4): 59–67.

Hamburger, A., and G. Harangoz. 2018. ‘Factors Affecting the Evolution of Renewable Electricity Generating Capacities: A Panel Data Analysis of European Countries’. International Journal of Energy Economics and Policy 8 (5): 161–72.

Hamburger, Á. 2019. ‘Is Guarantee of Origin Really an Effective Energy Policy Tool in Europe? A Critical Approach’. Society and Economy 41 (4): 487–507. https://doi.org/10.1556/204.2019.41.4.6.

Jansen, J. 2017. ‘Does the EU Renewable Energy Sector Still Need a Guarantees of Origin Market?’ No

2017-27. CEPS Policy Insights. CEPS – Energy Climate House.

https://www.ceps.eu/publications/does-eu-renewable-energy-sector-still-need-guarantees-originmarket

———. 2018. ‘Should All Producers of Renewable Energy Automatically Receive GOs?’ Centre for

European Policy Studies. 12 March 2018. https://www.ceps.eu/publications/should-all-producersrenewable-energy-automatically-receive-gos.

[vii]Gillenwater. 2013 ‘Probabilistic decision model of wind power investment and influence of green power  market’, Energy Policy, 63, pp. 1111–1125. doi: 10.1016/j.enpol.2013.09.049.

Gillenwater, M., X. Lu, and M. Fischlein. 2014 ‘Additionality of wind energy investments in the U.S. voluntary green power market’, Renewable Energy, 63, pp. 452–457. doi: 0.1016/j.renene.2013.10.003.

[viii] Brander, M., M. Gillenwater, and F. Ascui. 2018. ‘Creative Accounting: A Critical Perspective on the Market-Based Method for Reporting Purchased Electricity (Scope 2) Emissions’. Energy Policy 112 (January): 29–33. https://doi.org/10.1016/j.enpol.2017.09.051.

[ix] I also investigated low-carbon electricity contractual instruments, specifically GO certificating the production of electricity from high-efficiency Combined Heat and Power plants.

[x] What businesses said about their motivation was taken at face value as to assess these statements was beyond the scope of this research.

[xi] See also section 12.3.1 (page 439) of my thesis.

[xii] Sotos, M. 2015. ‘GHG Protocol Scope 2 Guidance – An Amendment to the GHG Protocol Corporate Standard’. World Resources Institute, Washington D.C., USA. https://wriorg.s3.amazonaws.com/s3fs-public/Scope_2_Guidance_Final.pdf.

[xiii] See also concerns raised by Monyei and Jenkins (2018) about the wider implications of PPAs.

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