Net Zero Initiative for Energy

Executive Summary

Since its founding, the Net Zero Initiative (NZI) aims to support companies in their efforts to contribute to collective carbon neutrality in an ambitious manner consistent with climate science.

To achieve this, the initiative aims to structure the framework for measuring, targeting, and taking climate 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 many sectors that depend on it, such as industry and transportation. In addition, companies are required to demonstrate their ability to reduce emissions related to their electricity consumption, which are generally accounted for under Scope 2 of their carbon footprint.

This report provides guidance on the accounting treatment of renewable electricity purchases under Pillars A and B of the NZI. It is divided into two parts:

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

PART 1 - LOW-CARBON ELECTRICITY MARKET AND CARBON ACCOUNTING SYSTEMS

Electricity Markets and Supply Contracts

In recent years, numerous electricity supply contract systems have been developed around the world to allow companies to “choose” the type of electricity they purchase. Since electricity grids are interconnected at the regional or national level, it is rare for these supply contracts to reflect a physical connection between the generator and the 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 small, if not negligible[2], and the monitoring data needed to verify consistency over time is generally insufficient. Furthermore, green certificates contribute little to the financing of new renewable energy infrastructure. In 2022, the average price of a green certificate in France was 4.1 €/MWh[3], compared with 63 €/MWh[4] for the cost of producing additional renewable electricity (primarily ground-mounted solar and onshore wind).

Limitations of the Current Accounting Treatment for Renewable Electricity Purchases

Market-based accounting allows for the use of emission factors for renewable electricity purchased with a certificate, without having a 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 night can claim “renewable electricity” and emissions reductions on the market, thanks to guarantees of origin issued based on solar power generated on a summer day in Spain.

This spatial and temporal inconsistency not only risks slowing down the actual decarbonization of electricity (as in the previous example from Germany), but it also misleads consumers regarding the nature of the electricity they consume. Furthermore, this mechanism obscures the efforts needed to make the power grid more flexible (storage capacity, demand response) in connection with the development of intermittent renewable energy sources[5]. Figure 1 below illustrates this difference between the physical connection of an organization to a grid powered by renewable and non-renewable electricity, and the financial connection to the wholesale market using renewable certificates from across Europe.

At the European level, the market is flooded with Low-Cost Guarantees of Origin where renewable electricity generation is both easy and significant (solar power in Spain or hydropower in Norway, for example). However, stakeholders in these countries are also likely to claim low-carbon electricity for this same generation due to their physical connection to these capacity sources, preferentially relying on location-based accounting, which creates a risk of double counting.

A Need for New Methods and Criteria in Accounting Standards

In this context, this guide focuses on the following issues : Under what conditions does an electricity purchase agreement actually contribute to decarbonizing the electricity on which an organization depends? Can current carbon accounting reflect this? If not, how could it evolve to achieve this?

This guide focuses on the main types of renewable electricity contracts that exist, but does not cover guarantees of origin or any other certificates for non-renewable electricity. This is, however, an interesting development in the certificate markets, and its impact on emissions accounting could be explored at a later stage. This document presents methodological proposals for the accounting treatment of these contracts under the NZI. These proposals aim to reflect the actual impact of these various energy supply contracts in terms of emissions generated (Pillar A) and emissions avoided (Pillar B). In fact, these types of electricity supply contracts encompass different realities, with a highly variable impact on the decarbonization of electricity—an impact that current carbon accounting methods fail to capture.

PART 2 - RECOMMENDATIONS FOR CHANGES TO ACCOUNTING POLICIES

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

Criteria for Spatio-Temporal Consistency

This guide therefore sets forth ambitious criteria for spatiotemporal consistency between electricity generation and consumption, with the aim of driving the electricity market toward greater transparency and improved spatiotemporal consistency in electricity purchases. The main proposals in this guide concern market-based accounting for power plants and power purchase agreements under Pillar A:

1. Spatial Consistency : The buyer's facilities and renewable energy facilities must be connected to a grid and limited to neighboring countries, states, or provinces. This condition reflects the fact that, despite the interconnections between the power grids of different countries, states, or provinces, the amount of electricity transferred from one grid to another is often limited, particularly when the grids are not adjacent. The development of power interconnections is one of the European Union’s energy priorities, but it requires significant infrastructure. The interconnection capacity target for each country (with its neighboring countries) has been set at 10% of its installed capacity in 2020 and 15% in 2030[6], which is a far cry from an electrical grid where electrons would flow across the continent as easily as they do in the marketplace.
2. Temporal consistency: consumption must occur within 30 days of the GO’s issuance (monthly reconciliation), and the accounting of emissions reductions depends on the level of temporal consistency :
   • 100% of emission reductions can be accounted for using hourly reconciliation.
   • 50% of the emission reductions can be accounted for through daily reconciliation.
   • 25% of emission reductions can be accounted for through monthly reconciliation.
   • No reduction may be recorded if the consistency period exceeds one month.

Transparency and Accurate Monitoring of Electricity Markets

Some of these conditions, particularly the temporal alignment between electricity consumption and the issuance of renewable certificates (referred to as “temporal consistency” in this guide), pose technical challenges for reducing emissions under Pillar A, given that energy markets do not currently allow for accurate tracking.

Eventually, strict timing requirements are expected to be established for the accounting of GO in a few years. However, daily and monthly data may temporarily allow for the recognition of a partial reduction in emissions related to electricity consumption. These flexible conditions are intentionally ambitious, as strict guidelines are likely to promote rapid change in markets and organizations.

This transition phase was designed to encourage stakeholders to improve their scheduling consistency until conditions allow for a more feasible schedule alignment. In addition, the proposed accounting rules are intended to support ongoing initiatives to develop information systems with the required level of granularity. Furthermore, The development of an accurate and harmonized system for tracking the emission factor of the residual mix is also essential to ensure that market-based accounting is reliable and provides incentives for decarbonization.

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