Is all renewable energy procurement equally green?

The renewable energy hierarchy ranges from on-site PPAs to green tariffs.

April 12, 2021

The supply of renewable energy is a key element of the net zero carbon hierarchy.

The first step for companies is to determine how much energy 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 energy 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 energy procurement best practice in the context of their Advancing Net Zero framework. It identifies three main criteria for companies with net zero carbon commitments: purchased energy should be backed by renewable energy certification (REGOs), be renewably sourced and create additional capacity in the grid.

The renewable energy 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. A power purchasing agreement (PPA) is a bilateral contract between an energy developer and its beneficiary. 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. This is 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.

Figure 1: Renewable procurement hierarchy.

2. Second in the hierarchy are corporate PPAs. These enable users to negotiate directly with the renewable generator who agrees to provide power at a fixed price, usually for 15-20 years. This means that a user will need to project their electricity demands into the future with a decent degree of accuracy. Currently, corporate PPAs are only suitable for large electricity users with a consumption of approximately 15 GWh per annum. This is the equivalent of 1,224 homes’ energy use for one year. This procurement route therefore has its obvious limitations despite meeting all three UKGBC criteria.

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. To date, there has been little pricing difference between green and brown tariffs. However, as identified above, high quality green tariffs are currently scarce and come at a notable premium. Nevertheless, they should be pursued.

4. Ring-fenced REGOs refer to energy 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.

5. Standard or low-quality green tariffs refer to all other green tariffs on the market. Once the go-to for sourcing renewable power, standard green tariffs currently fail to meet two out of the three criteria for best practice. Most companies are currently on REGO-backed contracts and while this is an acceptable route for procurement, it’s not considered best practice.

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 additional criteria on the renewables front. The net zero criteria remains aligned with GHG Protocol Reporting Standard for Scope 2 emissions which allows companies to report zero carbon emissions on purchased electricity (Scope 2) 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 often associated with existing grid capacity, and therefore their role in the creation of new grid capacity is limited.

In addition, in many cases, energy suppliers offer green tariffed energy without generating any renewable energy themselves or buying any directly. They purchase mostly brown electricity on the wholesale market which is matched with REGOs bought on the secondary market and sold under green-tariff contracts.

To enable the differentiation of green-tariffs available on the market, Ofgem introduced a price cap on all energy sold by utility companies except those that purchase their entire supply directly from renewable developers, via Purchasing Power Agreements (PPAs). Prominent suppliers taking this approach include Ecotricity, Good Energy and Green Energy UK.

This differentiation is important because a certain amount of renewable power in the supply market is already mandated by the UK government. However, this proportion is not sufficient to help the UK achieve its net zero carbon targets by mid-century. It’s 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 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.

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: