Corporate RE procurement: three trends to watch

As the harmful effects of climate change grow increasingly obvious by the day, more and more organizations, governments and companies are placing decarbonization squarely on their agenda. In 2020 China, which is the world’s largest emitter, committed to achieving carbon neutrality by 2060. Newly elected President Joe Biden ordered the United States back into the Paris Agreement, while the European Union (EU) increased its emissions reduction target to 55% by 2030 and allocated one-third of its COVID-19 recovery budget to green investments. The EU also rolled out a new Sustainable Finance Disclosure Regulation, which enters into force in March 2021. The idea is to foster the transition of private investment to a climate-neutral economy and to crack down on greenwashing, or the practice of misleading the public about a company’s environmental soundness. In the private sector, more and more companies are joining renewable energy initiatives such as RE100 and Science-Based Targets, which in 2020 surpassed a historic milestone of 1,000 corporate signatories. Giants such as Microsoft and IKEA have set “carbon negative” and “climate positive” goals, and even oil and gas majors such as Shell and BP are aiming for net zero while adding renewables to their portfolios. In this perspective, 2021 looks really exciting and challenging at the same time. Based on our experience, we believe that corporate renewable energy buyers will be making decisions based on the following new trends. Trend 1: Taking on Scope 3 emissions A company’s largest source of emissions often occur upstream and downstream in its value chain, i.e. during the production and use of its products. These are called Scope 3 emissions, and unlike those under a company’s direct control (Scope 1) and from its power purchases (Scope 2), they are more difficult to tackle. On the other hand, Scope 3 may have the biggest potential to prevent the worst impacts of climate change. When one big player takes steps to cut its Scope 3 emissions it has a cascade effect on the companies in its supply chain, driving them to develop carbon footprint reduction initiatives. This in turn motivates new sectors, such as steel and cement production, to embark on journeys towards renewables and incentives collaboration. As is often the case, the world’s largest technology companies are setting the example: Amazon, Facebook, Google, Apple and Microsoft have recently stepped up to the plate to cut their Scope 3 emissions. Given the size of their supply chains, this is having major repercussions around the world. Microsoft is committed to becoming carbon negative by 2030 in terms of all three scopes. By July 2021, the company plans to implement a procurement process that incentivizes emissions reductions among its suppliers and encourages accurate reporting. By 2050, Microsoft will have removed all the carbon it has emitted since its founding in 1975. Scope 3 emissions from manufacturing make up about 75 percent of Apple’s overall carbon footprint. Accordingly, Apple has decided to transition the electricity used across their entire manufacturing supply chain — including material extraction, component manufacturing, and final product assembly — to 100% renewable sources by 2030. The other great example is the automotive sector. Aiming for zero-impact factories, automakers are pushing their supply chains to reduce their carbon footprints and in a bid to cut their Scope 3 emissions, they have come together under the Drive Sustainability initiative to harmonize vetting criteria for parts manufacturers. As of 2020, all of BMW’s 31 global manufacturing plants from Mexico to Malaysia are sourcing only renewable energy. A year earlier, Volkswagen introduced a new sustainability rating for its 40,000 suppliers, placing companies that don’t decarbonize their businesses at a competitive disadvantage. Moreover, VW has made the use of renewable energy for the production of HV battery cells a contractual requirement, and it has also placed a special focus on all larger aluminum parts, because producing them is an energy-intensive process. By producing aluminum with green energy and using recycled secondary materials, VW is minimizing CO2 emissions from its primary materials. The retail sector isn’t lagging either: Walmart has just launched an ambitious Gigaton Project aiming to remove one gigaton (one billion metric tons) of CO2 from the company’s global value chain by 2030. Over 2,300 suppliers from 50 countries are currently taking part in it, reporting 230 million metric tons of avoided emissions since 2017 – more than 20% of the goal – through energy, waste, packaging, agriculture, forests, and product use and design. Trend 2: Sustainability goals beyond simple renewable procurement Corporations are becoming increasingly aware of the environmental and social impacts of their renewable deals, and this, in turn, is shaping their decisions about which plants and utilities to choose to partner with. Green energy buyers want to not only ensure the obvious impact of the PPA on emission reduction, but also know how the wind or solar project developer treats the surrounding nature, local communities and its employees. The fact is, not all RE plants are created equal: two projects that look the same on paper can have very different effects on their surrounding environment — whether social, natural, or both. For example, some RE plants displace more fossil fuels than others. Some have to encroach on plant and animal habitats in order to get optimal access to wind and sun; others provide clean energy, but at the expense of local communities. Accordingly, project developers and utilities are taking such considerations into account. For example, Enel Green Power invites its PPA Partners to participate in the selected Create Shared Value initiative. This way, companies can meet their sustainability targets beyond carbon footprint reduction and in line with the organization’s strategy and priorities (for ex. sustainable agriculture, the empowerment of women or educating local communities). In addition, Enel Green Power offers its PPA clients a service called Sustainability Project Portfolio Management (PPM), which sets ESG targets to make the entire value chain of the business sustainable and aligned with the UN SDGs. Trend 3: PPA plus storage expected to boom Business needs energy 24/7, even when the wind isn’t blowing or the sun isn’t shining, and power networks progressively require more and more flexible sources to compensate for the unpredictability of RE plants and shift production when it is needed the most. We believe that energy storage systems will very soon become one of the key components of RE Power Purchase Agreements. This is because over the past decade, the rise of renewables has gone hand in hand with an 80% reduction in the cost of lithium-based battery energy storage systems (BESS), according to a World Bank May 2020 paper. Betting on storage not only helps to cut emissions further and to promote an image of sustainability and environmental protection — it also makes good economic sense, because a BESS has the unique ability to charge when demand is low and to dispatch when demand kicks in. This means offtakers can hedge against power price volatility by matching the production of their RE portfolio with their demand profile during peak price periods and beyond. What’s more, a BESS can be designed to provide multiple ancillary services to the grid and to recover production losses from RE generators — a capability which is referred to as benefit stacking. All these features add up to a lower levelized cost of electricity (LCOE) — a metric that estimates the revenue required to build and operate a generator over a specified cost recovery period. The LCOE of a renewable energy plant with a BESS installed on-site will be lower than that of conventional thermal generators, allowing for more competitive supply tariffs.

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Corporate RE procurement: three trends to watch

Corporate RE procurement: three trends to watch

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