Is all renewable electricity procurement equally as green?
The renewable energy hierarchy ranges from on-site PPAs to green tariffs.
The supply of renewable electricity is a key element of the net zero carbon hierarchy. The first step for companies is to determine how much electricity they can generate themselves, normally through on-site solar PV panels. For those companies that can’t generate their own supply at the scale required, the next step is to consider the various options to procure renewable electricity for their buildings.
Latest industry best practice guidelines
In March 2021, the UK Green Building Council (UKGBC) published some long awaited guidance setting out the principles for renewable electricity procurement best practice in the context of their Advancing Net Zero framework. The guidance identifies three main criteria for companies with net zero carbon commitments.
Purchased electricity should:
- be renewably sourced,
- be backed by renewable energy certification (REGOs), and
- create additional capacity in the grid
The renewable electricity procurement hierarchy below takes into account these criteria and the current renewables environment in the UK.
1. On-site PPAs are the preferred procurement route. Where on-site generation cannot be self-funded, building owners should consider outsourcing up-front costs to developers who can build and operate the renewable generating system and sell the energy back to them via a PPA. A power purchasing agreement (PPA) is a bilateral contract between an energy developer and its beneficiary. On-site PPAs are also the most carbon and cost-effective procurement route as the energy user will avoid emissions from grid transportation and distribution losses and save on non-commodity grid costs. This is unlikely to meet all the demand from a company so further options need to come into play.
Figure 1: Renewable procurement hierarchy.
2. Second in the hierarchy are corporate PPAs. Also referred to as physical PPAs, these differ from on-site PPAs in that the generation is located off-site. Corporate PPAs enable users to negotiate directly with the renewable developer on the building of a new utility scale renewable generation facility and to purchase the generated power at a fixed price, over a long period of time, usually for 15-20 years. A suitable user will need to have a significant demand for power (of approximately 15 GWh per annum) and be able project their electricity demands into the future with a decent degree of accuracy. This is the equivalent of 1,224 homes’ energy use for one year. To meet the UKGBC additionality criterion, both on-site and corporate PPAs would have to be for new generating assets. Limitations to consider are that both PPA options have a lead time for contracts to be negotiated and the new generators to be built. In both cases, an organisation’s electricity demand may not be met entirely and therefore further options are required to meet the remainder, more variable demand.
3. High-quality tariffs have a good chance of meeting all three criteria however, in most cases the additionality criterion will be challenging to prove. The UKGBC define high-quality green tariffs as those marketed by energy suppliers who purchase electricity only from 100% renewable sources. Prominent suppliers taking this approach which are also recognised by Ofgem include Ecotricity, Good Energy and Green Energy UK. High quality green tariffs are currently scarce and come at a notable premium. Nevertheless, they should be pursued.
4. Ring-fenced REGOs refer to electricity bought on the wholesale market that comes alongside the associated REGOs. This procurement route meets two of the three UKGBC criteria but will most likely fail the additionality criterion as the electricity backed by these certificates will be from existing generation.
5. Standard or low-quality green tariffs refer to all other green tariffs on the market. In most cases, standard green tariffs would meet UKGBC’s criteria (a) and (b). This is because electricity that is REGO backed, means it is from renewable sources, however due to the current energy market mechanisms that allow brown power to be matched with REGOs bought separately from the original power it came from, the UKGBC determined that this procurement route can only confidently meet criterion (b). Many companies are currently on REGO-backed contracts and while this is an acceptable route for procurement, it is not considered best practice for Net Zero as the sole procurement route for renewable electricity and should therefore be used only as last resort e.g. to meet the demand that cannot be otherwise met through better, more transparent procurement routes.
The question of ‘additionality’
Various industry guidance documents note that renewables used in real estate should meet the additionality criterion, including the UKGBC NZC Building Framework. This means that the renewable energy your company procures would not have been created if you hadn’t specifically requested it.
Most industry guidance, however, remains unclear as to whether this is a requirement or just a nice-to-have for those aiming to call themselves net zero carbon businesses. For instance, the Science-Based Targets Initiative, which recently launched its Net Zero Standard Criteria for public consultation, has not prescribed any additionality criteria on the renewables front. The net zero criteria remain aligned with GHG Protocol Reporting Standard for Scope 2 emissions which allows companies to report zero carbon emissions on purchased electricity (Scope 2) under the market-based approach as long as it is backed by renewable energy certificates, including REGOs.
Even so, with the UKGBC guidance above, real estate is coalescing around the need for renewable energy to be additional. This builds on the International Living Future Institute’s Zero Carbon Certification, currently the only building certification for net zero carbon buildings. This certification leaves no room for interpretation and requires that qualifying assets 'provide additional renewables to the grid i.e. not be existing renewables'.
The challenge with Renewable Energy Guarantee of Origin certifications (REGOs)
REGO-backed energy contracts have come under much scrutiny recently over their relevance in supporting net zero carbon efforts. REGOs are usually associated with existing grid capacity, and therefore their role in the creation of new grid capacity is limited. In addition, many electricity suppliers offer green tariff- energy without generating any renewable power themselves or buying any directly.
In the domestic sector, the price per unit of electricity is capped by Ofgem to protect energy users from sudden increases in energy costs and allow them to switch suppliers before they are charged a higher price. However, utility companies that procure power from 100% renewable sources, such as the three utility companies previously mentioned, are exempt from this price cap, enabling a clear differentiation between high- and low-quality green tariffs available in the market. This arrangement does not apply to commercial and industrial energy users. In a highly complex energy market with very ambitious decarbonisation targets, organisations should demand greater transparency from utility companies around REGO-backed contracts to enable them to assess whether their procurement approach meets the best practice criteria.
The differentiation between electricity generation that exists, and that which is in addition to current capacity is important because a certain amount of renewable power in the supply market is already mandated by the UK government. However, it is known this proportion is not sufficient to help the UK achieve its net zero carbon targets by mid-century. It is why additionality is so important; the private sector can increase the share of renewable sources in the grid on top of what’s mandated by the government.
Tackling ongoing challenges
The UK renewable energy market has been maturing quickly, and more renewable electricity generation capacity is being created every year. However, after government subsidies ended in 2015, the number of new generators coming online has fallen short in the past few years.
The renewable gas market is in a far less developed state and a strategy for reducing and decarbonising an organisation’s gas usage is another ongoing challenge.
Given the current environment and lack of new government backing on the horizon, the extent to which the UK can meet its ambitious net zero commitment remains in question. The private sector has been a key driver of supporting the development of new renewable capacity and should continue to do so. For now, the market is still challenging to navigate, particularly for those looking to back more renewable capacity creation in the grid. More flexible, accessible procurement options that meet the best practice criteria must be made available to users of all sizes to meet the growing demand. In the meantime, as major energy users within the UK, the real estate sector is uniquely positioned to come together and drive progress.
This article is part of our Net Zero: The Big Questions series which looks at some the complex questions around how buildings can achieve net zero carbon. Check out the rest of the series below: