For those among you who just had a shower, let’s start the morning with an article on greenwashing. When discussing decarbonization strategies with companies, this is a word that often pops up. Companies are afraid of being accused of greenwashing. Until now, this was a rather abstract threat. But now, environmental NGOs in the US have filed a complaint against Chevron with the financial authorities, accusing it of misleading investors by greenwashing: Chevron ‘Greenwashing’ Targeted in Complaint Filed With FTC (yahoo.com). That makes the greenwashing threat very concrete.
In decarbonization strategy talks, the catchall ‘greenwashing’ is often used in the same way as the word ‘speculation’ is used in hedging strategy discussions. As everybody has her/his own definition of the term, it can easily be used to settle an issue without conclusive arguments. The issue is that there is no legislation or regulation that defines what decarbonization means. So, yes there are justified complaints against companies claiming to decarbonize when there is no net benefit effect for the environment. This is clearly the case when the carbon-neutral energy that is bought would have been produced anyway, for example, when buying certificates from a 40-year-old hydro power station.
Way back in 2007, this was E&C’s first ever involvement in the buying of energy. Our client, with the most genuine green intentions, bought what was then an available ‘green electricity product’. Basically, they were paying a surplus for adding Guarantees of Origin coming from a Rhone Valley hydro power station built in the 1960s to their standard electricity product. E&C warned them that the net benefit to the environment was zero. But they went ahead. Two weeks later, their marketing manager attended a marketing event. He overheard the marketing managers of the energy supplier laughing that thanks to the green zeal of some of their customers they could now sell their most profitable electricity at an extra price, electricity they would have produced anyway. In my 21 years of advising big companies on energy markets, I have met many people that had very noble intentions regarding sustainability and doing something about climate change. However, left or right, I also ran into companies and people for whom the marketing aspect of greenery was the primary motive and the concern about global warming was somewhere on the bottom of the priority list. So yes, greenwashing is a genuine concern.
Greenwashing objections to green electricity products based on Guarantees of Origin or similar instruments, such as RECs or iRECs, have made them much less popular as an instrument for decarbonization. Quite frequently now, I meet with companies that simply brush them aside saying that they will not use them for their decarbonization efforts. They want to decarbonize by using Power Purchase Agreements (PPA) rather than certificates. I think this ignores a few things:
There are now higher quality certificates available that make sure there is a net benefit effect for the environment, for example, by using additionality and making sure that the certificates come from recently built assets.
Buyers of such certificates pay a surplus on top of the electricity price. This means they are making a financial effort to support the development of renewable energy. This isn’t always true for PPAs where often “we expect to make a saving” is a major motive for preferring them over certificates. Therefore, if you look at this through the looking glass of (financial) intentions, then certificates are clearly a more genuine and pure green effort than such PPAs.
PPAs, the main alternative to greening electricity supply compared to certificates, are long-term agreements (often 10 to 15 years) that come with significant volume commitments. These commitments are often overlooked as they are formulated as a take-or-resell, not a take-or-pay. However, everyone that ever ran into such take-or-resells (for example, during lockdown) will know that they can have serious financial consequences. Buying up to 100% of all electricity consumed through PPAs would mean that a company takes a huge amount of volume risk. Therefore, certificates will probably continue to be part of the decarbonization mix for a long time. Maybe a new market mechanism using blockchain technology will replace the current certificate system. But when writing off certificates at this moment, companies take a significant risk that decarbonizing the full 100% of all their electricity consumption will become very difficult to realize.
And last but not least: the green character of the electricity bought through a PPA will be established through certificate systems. If you set up a PPA in Europe, the Guarantees of Origin are an important element of them. It´s the same thing with RECs in the US. To claim that green electricity was bought through a PPA, it is important that the buyer also buys the certificates that are granted to the MWhs produced. Again, maybe a blockchain-based system will replace this, but for the time being we have to do this with the existing systems of GoOs, RECs, iRECs and similar. Now, talking about greenwashing; if you set up a PPA that doesn’t include the buying of the certificates granted, those certificates can be sold separately. This would mean that the claim to green electricity can be made twice. That’s not just greenwashing, it’s a green scam.
The greenwashing argument is also commonly used against the usage of carbon off-sets. Carbon off-sets are instruments where you continue to emit carbon, for example by traveling on an aeroplane or producing electricity with a diesel engine. However, you calculate the carbon emissions this fossil fuel usage caused and then ‘off-set’ them by buying credits from a project somewhere else, for example a reforestation project or a project to bring renewable energy to poor people. I have mixed feelings about this. On the one hand, this organizes an interesting stream of financing projects that are very valuable from a sustainability point of view, not just in terms of reducing global warming. Forestation has an important biodiversity side-effect and bringing renewable energy to Africa for example helps to eradicate energy poverty, a noble cause. On the other hand, I do understand that such off-setting can easily be used as an excuse to continue our old, carbon-emitting ways. Therefore, carbon off-sets should be used with caution.
PPAs are the latest to arrive on the decarbonization instruments scene, and therefore they still enjoy some novelty. However, a few months ago, when discussing green electricity during the weekly market call we have at E&C, one of my Dutch colleagues shared a link to a satirical TV programme in the Netherlands, where Google’s buying of PPAs for its Dutch datacentre was ridiculed as … greenwashing. The tone of that programme: ‘instead of giving this clean energy to the local citizens, the energy company sells it to a greenwashing multinational’.
PPAs have clear green credentials. Now that governments have reduced the level of subsidies in the wake of falling renewable technology costs, PPAs have replaced such subsidies as an instrument for renewable energy projects to get financing. Therefore, buying PPAs makes it possible for project developers to build windmills and solar parks. Moreover, with most PPAs currently being fixed price contracts, buyers are overtaking the market risk of the asset. Unfortunately, many companies that go down this route do so due to ignorance nourished by bad advice. They don’t even realize what a noble contribution they pay to the decarbonization cause as they’re not aware of how much risk they are taking.
As you can see, decarbonizing without being accused of greenwashing isn’t an easy task. Here’s some guidance to help you with it:
As a risk manager, my initial advice is to diversify the risk. Don’t exclude instruments based on vague conceptions but give all of them a place in your strategy. Set up a portfolio of different PPAs, diversifying them through technology, geography and the moment that you sign them. If you allow yourself to sign cross-border or virtual PPAs – a fantastic instrument – keep diversifying. Don’t put all your eggs in one basket. The same goes for certificates and carbon off-sets: diversify.
Start with low hanging fruit. Sounds self-evident? I see again and again how companies start to put their efforts into those paths to decarbonize that will lead to the label 'not technically and/or economically feasible'. They want to show their green zeal by starting with the most advanced stuff. At the same time, they consider those options that are well-proven to be too mainstream.
Always continue to apply common sense. Whatever you do, ask yourself the question: ‘does this mean there will be less carbon in the air’? If your answer is ‘yes’, you have a good basis for a solid defence if you are ever accused of greenwashing.
A special word should be said here about the ‘locality’ argument, one that often plays an important role for many companies. They want the electricity to be locally produced and/or want a physical connection between the asset and the producing site(s). Some even go as far as to prefer a direct cable but for most the public grid is sufficient. Well, my comment to that is: ‘the climate couldn’t care less’. Global warming is a global, not a local, problem. Whether the carbon dioxide is emitted or not emitted in this or that country has no impact at all on global warming and climate change. What counts is the net global emissions. So, if you choose locality as an important criterium for selecting assets from which you buy, either through certificates or PPAs, do it for other reasons than decarbonization in itself.
A note to the reader: In this article, I’ve focused on buying green electricity as that is my expertise. I don’t mention decarbonization of the heat supply, even if I have a lot of experience in that as well, because similar reasoning as to greening electricity supplies also applies. It is enough to take into account that decarbonizing the heat supply is more difficult and more expensive; that fruit is clearly still hanging higher. I also don’t mention the important aspects of full scope decarbonization. This is at the core of the discussion regarding Chevron. For oil companies, decarbonization isn’t about using green electricity to pump the oil. It’s about stopping the pump and the emissions caused by the product they produce. I don’t have enough information about Chevron’s intentions and efforts to make any judgement, but obviously for oil companies this is an existential question. We’ll be watching with a lot of interest to see what the FTC will have to say about it, not just because it will have a huge impact on the energy industry as a whole, but because it will also provide further guidance on how to choose the right mix of decarbonization options.