Market-Based Methodology

A market-based approach accounts for emissions based on the electricity companies have actively chosen or, in some cases, not chosen. The electricity purchased from specific providers may include fossil fuels, renewable, or other types of generation facilities. Market-based emissions are calculated using information from contractual agreements, which is any type of contract between two parties for the sale and purchase of energy.

These contracts can involve deals where energy is purchased along with information about how it was generated (bundled) or through separate purchases of certificates that represent the energy’s environmental attributes (unbundled). The key difference is that in bundled purchases, the renewable energy and its attributes come together, while in unbundled purchases, the attributes are acquired independently of the physical electricity.

The emission factors used in the market-based method are aligned with these procurement arrangements. The EPA encourages using renewable energy, such as RECs, to reduce market-based Scope 2 emissions. Organizations can also contract directly with renewable energy generators or purchase green power from their suppliers.

Types of Market-Based Emission Factors (in order of preference)

1. Energy Attribute Certificates (EACs): These include renewable energy certificates (RECs) or Guarantees of Origin (GOs). If an energy attribute certificate includes an emission factor, it can be used to quantify emissions. EACs typically have zero emission factors because they represent renewable energy, but may have non-zero values if fossil fuel or biomass components are involved.
2. Contracts: An organization can have a contract, such as a power purchase agreement (PPA), to buy electricity directly from a specific generating facility. If certificates are not available, the contract itself carries the emission factor associated with the generation, regardless of the energy source.
3. Supplier-Specific Emission Factors: Some regulated or deregulated electricity suppliers provide emission factors for the electricity they sell. To be valid for market-based reporting, the factor must account for all the electricity delivered by the supplier, including any it purchases from other generators.
4. Residual Mix Factor: This factor represents the emissions that remain after certificates and contracts have been claimed. It’s less commonly available, but organizations should check each year for its availability during GHG inventory calculations.
5. Regional Emission Factor: If none of the above options are available, a regional grid average emission factor can be used. This calculator relies on eGRID subregion emission factors in such cases.
6. National Emission Factor: For U.S.-based emissions, this factor is generally not applicable, as regional factors are available.

Quality Criteria for Contractual Instruments:

To use contractual instruments for market-based reporting, they must meet the following criteria:

1. Convey the GHG emission rate associated with the electricity produced.
2. Be the only instruments representing GHG claims for that quantity of electricity.
3. Be tracked and retired, canceled, or audited by the reporting entity.
4. Have a vintage (date) that closely matches the reporting period.
5. Be sourced from the same market as the consuming entity.

The EPA’s guidance on purchased electricity includes best-practice recommendations that go beyond these minimum requirements. In cases where an organization buys electricity from a specific source for reporting under the market-based method, but this source provides less than 100% of the facility’s total energy use, it’s essential to input the data accurately.

Consider the following scenario:

• A company procures electricity for two buildings.
• Building A has a total energy consumption of 100,000 kWh, with 25,000 kWh purchased alongside renewable energy certificates (RECs) from a local wind farm.
• Building B has a total energy consumption of 50,000 kWh, with all electricity coming from the local utility.
• Many renewable energy sources have emission factors of zero for RECs.
• No other market-based emission factors are available.

To appropriately calculate emissions for Building A, it is necessary to split the market-based emissions between the different energy sources, while also avoiding double-counting. In this case, your data for Building A should be divided into two separate data points – one using the local utility’s specific emission factor to account for the 75,000 kWh portion of the electricity purchase, and one using the wind farm REC emission factor (i.e. zero). For Building B, all electricity is from the grid without any market-based mechanism, so its market-based emissions are the same as its location-based emissions (and therefore does not need to be divided out).

Note that for market-based reporting, emission factors for RECs are often assumed to be zero, but supplier-specific factors must be entered for electricity purchased from the utility. If there is no market-based mechanism, the market-based emissions will equal the location-based emissions.

Energy Attribute Certificates

Energy Attribute Certificates (EACs) are tradable instruments that certify the production of energy from renewable sources, such as wind, solar, or hydropower. They allow energy consumers to purchase renewable energy and claim that their consumption is based on clean energy, even if the physical electricity comes from a mixed-source grid. EACs decouple the renewable energy generation from the actual electricity supplied, enabling flexibility in how and where renewable energy is purchased and consumed.

There are several types of EACs, with the most prominent being Guarantees of Origin (GOs) and Renewable Energy Certificates (RECs). Both serve the primary function of certifying renewable energy generation, serving as tracking mechanisms for renewable energy, but they differ in terms of geographic scope and regulatory frameworks. While both serve similar purposes, GOs are specifically designed for the European market and align with the EU’s energy and sustainability regulations, whereas RECs function in a broader set of regions, including North America.

Renewable Energy Certificates

Renewable Energy Certificates (RECs) play a vital role in market-based emissions reporting, particularly for Scope 2 emissions. RECs are tradable, non-tangible energy commodities that represent proof that one megawatt-hour (MWh) of electricity was generated from a renewable energy source, such as wind, solar, or hydro. When an organization purchases RECs, they essentially acquire the rights to the environmental benefits of renewable energy generation, even if the physical electricity they use is from conventional sources.

The REC comes in the form a digital or paper record, often an electronic certificate, that represents the environmental attributes of one megawatt-hour (MWh) of renewable energy generation. It doesn’t have a physical form like traditional commodities, but it contains key information, including:

1. Unique serial number: Identifying the certificate and preventing double counting.
2. Generation source: The type of renewable energy used, such as wind, solar, or hydro.
3. Generation location: Where the renewable energy was produced.
4. Vintage date: The date or period when the energy was generated.
5. Issuing body: The organization responsible for verifying and issuing the REC.
6. Tracking system: A database or system (like Green-e in the U.S.) that tracks the creation, trade, and retirement of the REC.

This data is typically held within a REC tracking system that monitors the trading and retirement of certificates, ensuring transparency and compliance with renewable energy claims.

In a market-based methodology, RECs allow organizations to claim the use of renewable energy and reduce their Scope 2 emissions. By retiring RECs, companies can match their electricity consumption with renewable energy generation, thereby reporting a zero-emission factor for that portion of their energy use. However, it’s important to ensure that the RECs meet quality standards, such as proper tracking and retirement, and are sourced from the same market as the organization’s energy consumption.

The EPA encourages the use of RECs as a practical tool to reduce market-based emissions. By integrating RECs into an organization’s energy procurement strategy, it helps decouple energy consumption from the reliance on fossil fuels, fostering a transition toward cleaner, more sustainable power generation.

Guarantees of Origin

Guarantees of Origin (GOs) are certificates used in Europe to provide proof that a specific amount of electricity was generated from renewable energy sources. Under the European Union Renewable Energy Directive, GOs ensure transparency by verifying the source of electricity in a consumer’s energy mix. They allow companies and individuals to claim that their energy consumption is renewable, helping drive the demand for clean energy across Europe. Unlike other renewable energy certificates, such as RECs used in the U.S., GOs are specifically tailored to the European market and play a key role in meeting the EU’s renewable energy targets.

Contracts

Direct contracts for market-based emission factors allow organizations to directly source electricity from specific generators, which in turn influences their reported emissions. In a market-based approach, organizations can use contracts like Power Purchase Agreements (PPAs) to do this. These contracts serve as a crucial mechanism for reducing carbon emissions, especially when organizations aim to secure renewable energy at a fixed price over the long term.

Power Purchase Agreements

A Power Purchase Agreement (PPA) is a contract where a company agrees to buy electricity directly from a renewable energy producer, like a solar or wind farm, for a set price over a long period. This helps the renewable energy producer get the funding they need to build their project, while the company gets a reliable source of clean energy at a stable price. For businesses, PPAs are a great way to support green energy, reduce their carbon emissions, and protect themselves from unpredictable electricity prices in the future.

There are two main types PPAs – physical and virtual. In a physical PPA, the company buying the energy gets the actual electricity from the renewable source, which is delivered through the regular electricity grid. This type of deal usually happens when both the company and the energy producer are in the same area.

A virtual PPA works a bit differently. The company doesn’t get the actual electricity but instead gets certificates that prove they’re supporting renewable energy. These certificates, like Renewable Energy Credits (RECs) or Guarantees of Origin (GOs), show that the company is using clean energy. The company still agrees on a fixed price for the energy, but any difference between the market price and the agreed price is settled with money, making this option more flexible for companies in different locations.

Figure 1: POWER PURCHASE AGREEMENTS

Supplier-Specific Emission Factors

Supplier-Specific Emission Factors represent the GHG intensity of electricity delivered by a specific supplier. This refers to the emission rates provided by electricity suppliers, which detail the greenhouse gas emissions associated with the electricity they sell to customers. These emission factors can vary depending on the energy mix of the supplier—whether they generate electricity from renewable sources like wind and solar, or from fossil fuels such as coal and natural gas. Supplier-specific emission factors are useful for companies that want to accurately reflect the emissions from the electricity they consume, based on the actual energy they receive from their supplier.

Imagine a company operating in a deregulated electricity market. It chooses an electricity supplier that provides an energy mix of 50% wind power and 50% natural gas. The supplier-specific emission factor would reflect the emissions from both the wind and natural gas components. Since wind power has an emission factor of zero, the overall supplier-specific emission factor would be lower than if the company had purchased electricity from a supplier using only fossil fuels.

Supplier-specific emission factors give organizations a more accurate way to measure their market-based Scope 2 emissions by directly reflecting the emissions from the electricity they purchase. These factors are especially useful in markets where companies can select their energy suppliers, enabling more precise emissions tracking and encouraging the procurement of cleaner energy. In simple terms, supplier-specific emission factors tell you how “clean” or “dirty” the electricity you’re buying is, based on where it’s coming from. Companies use this information to measure the impact of their electricity use on the environment and to report their emissions more accurately.

Residual Mix Factor

The residual mix, also known as the default mix, represents the emissions from electricity that are left over after renewable energy certificates (RECs), Guarantees of Origin (GOs), and direct contracts have been claimed by others. In other words, it reflects the emissions associated with the electricity that hasn’t been specifically allocated to any market-based agreements or clean energy claims.

When organizations purchase electricity from the grid without a specific contract or certificates, they are often consuming electricity from a general pool that includes both renewable and non-renewable sources. The residual mix factor accounts for emissions from this unclaimed electricity. It’s essentially a default emission rate for any energy that hasn’t been directly linked to a cleaner, renewable source through contracts or certificates.

Although the residual mix factor is not always available in all regions or markets, it can be an important component in greenhouse gas inventory calculations. Organizations should check for its availability each year when calculating their Scope 2 emissions under the market-based method. If available, using the residual mix factor provides a more accurate reflection of the emissions from grid electricity that wasn’t claimed as renewable by anyone else.

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