Originally published on Energy Post.
By Benedict De Meulemeester
A growing number of companies are committed to greening their energy supply. But is it better for businesses to buy clean energy or to invest in producing it themselves? Benedict de Meulemeester, Managing Director of Brussels-based E&C Consultants, discusses the pros and cons of different options and concludes that it may be a good idea to go all the way.
An impressive number of major companies are greening their electricity use. Top of the bill might be Ikea, which has committed to produce as much renewable electricity as it consumes in its industrial sites, storage sites and shops by 2020. Apple is also approaching 100% renewable electricity supply rapidly – it was already at 93% in 2015. Other companies that have committed to the symbolic 100% renewable electricity supply by 2020 target are Swiss RE, Bank of America, BMW, British Telecom, Coca Cola, Goldman Sachs, ING, La Poste, Phillips Lighting, Sky Entertainment, UBS and Unilever. (See for more names and information the RE100 website.)
With a climate change denying Trump administration in the US, one could easily be pessimistic about the prospects of a further greening of the world’s energy supply. However, I believe that the renewable energy revolution is a train that is rolling and can’t be stopped in its tracks. First of all, a large part of the public is convinced that climate change is a real problem. Companies feel a pressure to present green energy credentials to clients, current and future employees, investors, or they just go green because of an inborn sense of social responsibility.
We have discovered that it is not a good idea to turn the whole equatorial zone into a massive palm oil plantation
Secondly, the costs of building renewable energy generation have dropped spectacularly. Energy from windmills now costs between €52 and €110 per MWh, according to Wind Europe. Electricity from photovoltaics looks even more spectacular, with some projects going as low as $30 per MWh. In many places in the world, the all-in cost of consuming electricity from the grid is higher, making it profitable to generate on-site green electricity rather than buying from the grid.
Renewable energy is also playing a crucial role in bringing electricity to poor countries. Access to green electricity in remote regions, isolated from reliable grids, can be crucial for development. If Donald Trump thinks that his skeptical approach to greening energy supply is part of a business-like attitude to the presidency, then he is mistaken. A 21st century businessman integrates green energy supply goals in his corporate strategy, because they make business sense.
But if you’re in business and want to have a clean energy supply, you are confronted with a dilemma: will you go green by sourcing green electricity from the grid or by investing in your own green electricity production?
There are a number of issues to take into consideration here. Let’s see what they are and how we may address them.
1. The physics and logistics of electricity supply make it difficult to label
Many years ago, we researched the green energy options of a client of ours. One of their team members insisted that he wanted proof that the green electricity was coming from a particular windmill near their factory. Due to the physics of electricity it’s impossible to do this. You cannot produce MWh’s in your windmill and attach a label to them saying: “Electricity from windmill so-and-so, to be delivered to company so-and-so”.
Electricity supply works by keeping the tension on the grid at a constant level by injecting as much electricity into the grid as the end-consumers are collectively consuming. But there is nothing that is physically being moved from place A to B. Therefore, it is impossible to say where the MWh’s that you consume were produced.
To deal with this, systems such as the European ‘certificates of origin’ have introduced a double marketing system. Producers of green electricity in Europe receive a certificate of origin. This is a piece of paper that says that a MWh of electricity was produced by a windmill, solar panel, hydropower, geothermal, biomass, etc.
Whether you pay for the certificate of origin or not, the green electricity would have been produced anyhow
The green electricity producer will sell electricity twice. The product itself (often called the “grey electricity”) goes to the grid at market prices. Next to that, the producer will make some extra income by selling the certificates of origin in a separate market.
Energy suppliers buy these certificates and bundle them with the physical MWh’s that they supply in green electricity products. That doesn’t mean that the power you consume comes from a particular windmill or solar panel. It means that as a consumer you have made an extra investment to support renewable energy. Some consumers have taken the labeling logic a step further by buying certificates of origin themselves in quantities equal to their physical consumption.
2. Green comes in many shades
More than 20 years ago, I read a book which envisioned a future in which all of the world’s energy would be supplied by biomass. The theory was that biomass is carbon-neutral, as the carbon dioxide produced by burning the plant material would be compensated by the CO2 sucked from the air by the growing plants. Green activists embraced the biomass idea heartily.
Twenty years later, the world and definitely the green movement has grown much less enthusiastic about biomass, for various reasons. Due to its low calorific content, you need a lot of plant material to produce a reasonable amount of energy. This causes huge logistic problems.
Another problem is the huge amounts of land that you need to produce sufficient biomass for supplying the world with energy. Land that in many cases could be used better to grow food. And land that was sometimes won by cutting down valuable, bio-diverse and more carbon-sucking rain forest. In short, we have discovered that it is not a good idea to turn the whole equatorial zone into a massive palm oil plantation. Finally, the theory of the carbon-neutrality of biomass can be challenged, especially if you cut rain-forest to plant palm oil and when you ship your biomass halfway across the globe.
Many well-intentioned biomass projects have ended in public relations nightmares due to the questionable environmental credits of burning plant material. To investors’ horror the environmental groups that push for more green energy are often the first ones to raise protest against specific projects. This does not only apply to biomass. Think about the many times local green activists have raised protests against the construction of windmills.
Certificates of origin are granted to any green electricity project, regardless of its real environmental merits. If you consider going green, you might want to make some extra investments by buying higher quality certificates.
3. Buying green electricity is very cheap
In Europe, you can currently buy certificates of origin that are very cheap. The reason for this low price is simple: demand is lower than supply. Every MWh of green electricity produced in Europe gets a certificate. At this moment, 29% of all electricity produced in Europe is green (2015 data coming from Agora Energiewende). As long as all the citizens, companies, public authorities, etc. that buy green electricity consume collectively less than 29% of all electricity consumed in Europe, the demand for green electricity will be lower than the supply. Hence the low price of buying green electricity.
In many cases, renewable energy is an interesting investment as the return is relatively stable and reliable
If your only interest in buying green electricity is “green-washing”, getting the paper on the wall to say that you buy green so that you can satisfy the customers that are asking for it, the low price of green electricity is good news. However, many customers have more serious intentions of making a valuable contribution to the environment. For them, just spending a few ten thousands on certificate-buying will not be very satisfying.
Moreover, a public relations catastrophe is looming again. Environmentalists are increasingly aware of how easy and cheap it is to claim ‘100% renewable electricity’ by buying certificates of origin. Clients that involve NGO’s in their sustainability policy (e.g. through the WWF Climate Savers initiative), already feel the pressure to do something more valuable than buying 15 cent per MWh certificates of origin.
4. Not all green electricity is good for the environment
So certificates of origin don’t work as a tool for putting pressure on energy companies to increase their green electricity production. But could they work as a system to stimulate investment in new green energy generation?
That is doubtful. Very often, the money you pay for certificates of origin goes to an old hydropower station or a windmill, solar panel or biomass power station that have existed for many years. For hydro, wind and solar, the marginal cost of production is 0, meaning that their owners will produce the electricity whenever they can.
This brings us to the startling conclusion: whether you pay for the certificate of origin or not, the green electricity would have been produced anyhow.
So, your effort to pay extra for the certificates of origin isn’t keeping a gram of carbon dioxide out of the air.
You could solve this by buying higher quality certificates. However, if you invest every euro you spend to source green electricity in your own renewable energy production, you are certain that you are keeping CO2 out of the air. It will mean that a windmill, solar panel or other project gets built thanks to your efforts that pushes fossil-fuel fired MWh’s from the grid.
True, the investment costs to produce your own energy will be larger than what you spend buying certificates, so it might be financially impossible to achieve the 100% renewable goal in this way. But the money is spent much more wisely and with a better effect on the environment.
5. Sourcing means spending money without return, contrary to investing
Which brings us to a next observation. Spending money on certificates is just that, spending. Investing money means that you can expect a return on your euros or dollars. On-site renewable energy production is often developed by a third party with a power purchase agreement. In many cases you will receive a fixed amount of money for renting your terrain or rooftop.
Greening your energy supply takes more reflection than just buying a green power product based on certificates of origin
In addition, you can buy the electricity at a price below the price at which you buy from the grid. Such projects lead to savings, and if you can engage with a third party you may not have to invest the company’s money at all.
When you invest in off-site renewable energy projects, the return will depend on the particular set-up, and often on the subsidy arrangement. In many cases, renewable energy is an interesting investment as the return is relatively stable and reliable.
6. What do you want to achieve with your green energy efforts?
You will have noticed by now that greening your energy supply takes more reflection than just buying a green power product based on certificates of origin. Investing the money in your own green electricity production may be a more valuable approach, both for the environment and for your financial bottom line.
To determine your approach, it is worthwhile to make a good preliminary analysis of what you want to achieve with your green energy efforts, e.g. through a stakeholder analysis. If you’re just greening to satisfy customers, you might be happy with the certificates of origin. If you also want to prove your green credentials to environmentalists or to more discerning customers – or because you find it important yourself – you might decide to go deeper.
Reprinted with permission.