Scope 2 and market-based accounting - workshop report

Abstract

This report summarises the presentations and discussions at an international workshop on ‘Scope 2 and Market-based Accounting’, held on 28^th April 2023 at the Technical University of Denmark (DTU). There was broad agreement that the current GHG Protocol scope 2 guidance is problematic in terms of ensuring accurate GHG claims. Several presentations discussed the necessity of temporal and spatial matching of consumption and energy attributes, and an identified topic for further research is to determine the spatial boundaries of an electricity grid. Additionality was also a key issue in most of the presentations and the discussions, either as a further necessary requirement for accurate market-based accounting, or for reporting on and incentivising actions that achieve genuine real-world impact. In either case, there was agreement on the need for tests or indicators to operationalise the concept of additionality.

Keywords:

• scope 2
• market-based accounting
• additionality

Introduction

This report summarises the presentations and discussions at an international workshop on ‘Scope 2 and Market-based Accounting’, held on 28^th April 2023 at the Technical University of Denmark (DTU), and hosted by its Centre for Absolute Sustainability. The focus of the workshop was on corporate accounting for greenhouse gas emissions from purchased electricity, called ‘scope 2′ emissions, and the use of purchased attributes for reporting these emissions, called ‘market-based’ accounting [1]. The background context for the workshop is the revision of the GHG Protocol’s guidance for scope 2 reporting [2], with the workshop providing a forum for discussing issues and research relevant to the revision of the guidance. Participants at the workshop included academics, data providers, electricity suppliers, and NGOs.

The workshop involved a number of presentations followed by open discussion sessions. The following section provides a summary of seven presentations, and the concluding section presents key messages from the presentations and discussions.

Summary of presentations

The presentation from Olivier Corradi, CEO at the emission factor/data provider Electricity Maps [3], discussed the issue of credibility with the current scope 2 guidance. It was noted that under current market-based accounting rules companies can report zero scope 2 emissions although still relying on fossil-generated electricity, and that the market-based method frequently can reflect emission reductions that have not actually occurred. The presentation suggested that the future iteration of the scope 2 guidance should reflect the physical reality of the grid, including spatial and temporal deliverability of electricity consumed alongside claimed attributes. Granular carbon emission data are already available for many countries (60+) and there are solutions for missing areas. It was also noted that scope 2 cannot include an impact measure (as this requires a consequential accounting approach), but that such information might be of value and could be reported separately.

Jon Sigvert, founder of Reel, an electricity supply company, presented on the limitations of the current market-based accounting rules, especially in relation to additionality. At present, renewable electricity procurement might mislead organisations, and electricity procurement initiatives should instead lead to real, verifiable emission reductions. The key issues with the current scope 2 guidance were identified as a temporal and spatial mismatch between the electricity consumed and the electricity procured, and a lack of additionality. Currently, additionality is not rewarded, with non-additional certificates ranked equally with contractual arrangements that are more likely to achieve additionality, such as power purchase agreements. Part of the problem is that there is no commonly accepted definition of ‘additionality’, and additionality is currently not quantifiable. The updated scope 2 guidance should therefore provide a standardised definition of additionality, which will allow organisations to make informed decisions to induce genuine emission reductions.

Malte Schäfer from the Technical University of Braunschweig, Germany, presented on his research developing a metric for measuring the likelihood of additionality from different market-based instruments. The proposed additionality metric (AM) is based on two aspects: a. the price a company pays for electricity relative to the levelized cost of electricity (LCOE); and b. the contract duration. Applying the metric tentatively to two contractual options in Germany, unbundled certificates and a power purchase agreement (PPA), the AM for the PPA is 25% higher, indicating that it is more likely to achieve additionality. The metric is a work-in-progress, and a number of limitations were also presented, including the fluctuating nature of market prices, and the possibility that longer contracts may not always be desired by project developers.

Anders Bjørn from the Technical University of Denmark presented an on-going research project which is reviewing existing empirical studies on the impact of different types of renewable energy certificates (RECs) on renewable energy development, and on emission reductions. The review focuses on studies that compare scenarios with RECs to baseline scenarios without RECs. Of the ten existing studies identified (so far), two use financial analysis of individual renewable energy projects to estimate if/when revenues from RECs sales are a deciding factor in the decision to invest (e.g. Gillenwater et al. [4]). The remaining eight studies use energy system models to optimize the entire energy system of a region with and without a RECs market in place (e.g. Ricks et al. [5]). Work is ongoing to extract data from the existing studies for the following two indicators: a. additional renewable energy generation (or capacity) per unit of REC; and b. displaced GHG emissions per unit of REC.

Lissy Langer from the Technical University of Denmark (also involved in the review study presented above) provided a more in-depth analysis of how additionality is modelled within energy systems analysis. Although many recent studies focus on the levelized cost of hydrogen and consequential emissions for ‘renewable’ hydrogen production, the findings from such studies also provide more generalised lessons for understanding the additionality of renewable electricity procurement. Electricity system capacity expansion models assume the system is centrally planned to minimize system-wide costs, and PPAs are modelled as designated capacity investments. It is possible to model the effect of different requirements on the use of RECs, such as temporal matching, deliverability, and whether the generation facilities supplying RECs are ‘new’. Two alternative modelling approaches were compared (similar to Cybulsky et al. [6]): a. ‘non-compete’ models, which fix the amount of renewables used to meet baseline system demand, where any increase in renewables in the intervention scenario does not interact or compete with this baseline amount of renewable generation (e.g. Zeyen et al. [7]); and b. ‘compete’ models that allow interaction/competition between renewables used to meet intervention scenario requirements and renewables that would have existed in the baseline (e.g. Ricks et al. [5]). A comparison of both modelling approaches (on the same grid) shows that hourly matching of consumption to renewable generation results in lower system-wide emissions than annual matching, and indicates that a ‘non-compete’ approach (i.e. if RECs are forced to be additional) in all cases results in lower emissions [6].

Jesse Backstrom from Texas State University presented an on-going study on the impact of corporate PPAs on renewable energy deployment in the United States. The research uses two-way fixed effects regressions and county-level data for the period 1990 to 2021, with the results indicating that both utility and corporate PPAs have influenced the deployment of renewable energy (RE) capacity, although the effects are heterogeneous. The effect of non-utility PPAs on renewable capacity is generally smaller than that for PPAs signed by utilities. However, these effects vary based on the RE project type (i.e. solar or wind), and on the renewable resource endowment of the area. Non-utility PPAs also appear to be more flexibly used.

Matthew Brander from the University of Edinburgh presented a paper, since published [8], on the necessary conditions for accurate value chain GHG inventories, and two proposed solutions for market-based accounting. Using thought experiments, the research finds that market-based attributes may be considered an accurate reflection of value chain emissions if the following conditions are met: a. there is no traceability to the emission source physically used; b. the attributes are from sources that could have physically served the company (which entails spatial and temporal matching); c. and there is a causal relationship between the company and the attributes claimed (linking to the issue of additionality). The first proposed solution to the problems associated with current market-based accounting is to use only location-based accounting for scope 2, and to report any impacts from company actions as separate information. A second proposed solution is to allow market-based accounting, but subject to the conditions identified above.

As evident from the presentations outlined above, additionality was a key issue, and was the focus of further debate during the discussion sessions at the workshop. Additionality was identified by participants as either necessary for accurate scope 2 market-based accounting, or for incentivising actions that achieve genuine real-world impact and for reporting on these outcomes separately from scope 2. Although there was no agreement on whether additionality could be used within scope 2 to ensure a causal relationship between reporting companies and the attributes they report, there was agreement that scope 2 should not include values for avoided emissions. There was also agreement on the need for tests or indicators to operationalise the concept of additionality, though whether used within or separately from scope 2 remained an open question.

Conclusions

Based on the presentations and the discussions in the workshop several key issues were identified, including emerging areas of consensus and topics for further research. There was broad agreement that the current scope 2 guidance is problematic in terms of ensuring accurate claims. Several presentations discussed the necessity of temporal and spatial matching of consumption and attributes, and a related topic for further research is to determine the spatial boundaries of an electricity grid, in terms of physical deliverability. Additionality was also a key issue in most of the presentations and a focus of the discussions, either as a further necessary requirement for accurate market-based accounting, or for reporting on and incentivising actions that achieve genuine real-world impact. In either case, there was agreement on the need for tests or indicators to operationalise the concept of additionality, noting that research on this topic is already underway.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Data sharing is not applicable to this article as no new data were created or analyzed in this study.