Electricity producers in Europe can certify electricity from sustainable sources (wind, hydropower, solar). One certificate is issued for each megawatt hour fed into the grid in this way. Prices vary depending on the location and age of the plants from 0.15 to 2 €/MWh (in Germany as of 2021).1
What is the problem?
This green/renewable energy certificate (REC or guarantee of origin) can be traded separately from the actual physical electricity. This means companies in countries with comparatively little renewable energy share in the grid mix can buy these certificates and “virtually” declare their entire electricity consumption as green energy. On the other hand, the electricity that is actually fed into the grid by the electricity producer (e.g., a hydropower plant in Norway) may no longer be declared green.2 This way, Norway – had an 82% grey energy share in 2019 despite producing 98% renewable energy.1
Now, looking into the physical side of the equation, companies that are located directly at the electricity supplier in the respective country either obtain the green electricity from the grid or directly from the place of generation. These companies do not buy guarantees of origin because they are located at the physical origin of green electricity. Due to the Uniform Emissions Accounting Regulation, companies will still disclose the energy physically obtained from a renewable source.2
The problem summarized: Some consider the origin of electricity according to the tradable system of certificates of origin, while others use the physical reality of electricity distribution as a benchmark. This way, renewable energy is double counted!
This is a known issue, but the Association of Issuing Bonds (AIB) still declares the activities legal as they neither violate the Renewable Energy Directive (RED) nor the national law. Generally, the system is very non-transparent, partly because the AIB only publishes consolidated, statistical data for the member states. It is (usually) not public, which company is buying certificates and which is not.
The damage it causes
Let’s make some fair assumptions based on official data:
Using the data in Table 1, a company with a yearly consumption of 100.000 MWh would need to pay 60.000 € to declare complete carbon-neutral electricity use.
Let’s put this into perspective: The emissions output from 100.000 MWh amounts to 34.000 tons of CO2e. An average passenger car emits ca. 1,65 tons of CO2e in a year (driving 15.000km)6 which would mean that companies can green label the equivalent of 20.000 passenger cars worth of emissions with only 60.000 €! To make matters worse, companies that would need to compensate their carbon offset with the much pricier emissions trading scheme (ETS) certificates currently avoid costs of ca. 3.4 million €. The money from the ETS funds sustainability actions in the EU which is why the RECs also slow down the investments into new renewable energy plants.
This system is doomed to collapse
An analysis by the German Federal Environment Agency shows that trading in green electricity certificates does not provide any significant benefit to the climate.7 Other studies show that companies reported a decrease of approx. 31 % scope 2 emissions. If buying the RECs is subtracted, the actual reduction decreases to only about 10%.8 There are also first lawsuits in action, that sue companies against their claims of offering climate-neutral products when buying RECs.9
This just shows that it will not go unnoticed by the European Commission, other stakeholders, and especially not with the public. Sooner rather than later, there will be a regulatory revision of this system. Companies should therefore critically assess if they want to keep going as before or if they want to anticipate change. If not for idealistic reasons, one should at least prepare for regulatory obligations and possibly hedge against massive cost increases.
There are three solutions to ensure actual sustainability for a company:
Power Purchase Agreement (PPA): A PPA is a long-term electricity supply contract between a company and an electricity producer. There are physical and virtual PPAs. They help promote major investments in the construction or continued operation of renewable energy plants.
Own power generation: Building a power plant on-site will ensure a green power supply and the increase energy-independency of a company.
Investing in reduction: Investing in technologies such as means of digitalization or more efficient machinery will reduce the amount of electricity needed.