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Jun 22, 2024

The Power of Onsite Solar Energy and RECs: Meeting GHG Reporting Requirements

May 16, 2024

Category: News

As businesses increasingly strive to reduce their carbon footprints and meet sustainability goals, the demand for renewable energy solutions has skyrocketed. Onsite solar energy systems are quickly becoming the most impactful way to harness clean energy while reducing greenhouse gas (GHG) emissions. When combined with Renewable Energy Certificates (RECs), these systems not only help meet GHG reporting requirements but also enhance corporate sustainability efforts. In this blog post, we'll explore the value of onsite solar energy and how RECs play a crucial role in GHG reporting, focusing on both location-based and market-based reporting methods and the implications for Scope 2 emissions.

The Case for Onsite Solar Energy

Cost Savings and Energy Independence

One of the primary advantages of onsite solar energy is the cash inflows generated from electric utility bill savings and tax credits, unlike the direct purchasing of RECs, which is a pure expense. By generating electricity on-site, businesses can directly reduce their reliance on grid power and mitigate exposure to volatile energy prices. Over time, the cost savings from reduced energy bills and the tax benefits can offset the initial investment in solar infrastructure, leading to substantial financial benefits. 

CapEx Model: In the CapEx (Capital Expenditure) model, the company makes an upfront investment or uses leverage to install the solar system. This model can lead to long-term cost savings as the system generates free electricity after the initial investment is recouped. Moreover, companies can take advantage of tax incentives and depreciation benefits.

OpEx Model: In the OpEx (Operational Expenditure) model, businesses can adopt an onsite solar energy system through a power purchase agreement (PPA) or solar operating lease (OpLease). This allows companies to benefit from solar energy with little to no upfront cost. They pay for the electricity produced by the solar system which can result in significant savings in comparison the direct purchase of RECs.

Environmental Impact

Onsite solar energy systems are a powerful tool for reducing carbon footprints. By generating clean, renewable energy, businesses can significantly decrease their GHG emissions, acting as a direct MWh-to-MWh reduction in GHG for both location-based and market-based reporting. This aligns with corporate sustainability goals and demonstrates a commitment to environmental stewardship, which can enhance brand reputation and appeal to eco-conscious consumers and investors.

 

Renewable Energy Certificates (RECs)

Understanding RECs

Renewable Energy Certificates (RECs) are tradable commodities that represent the environmental benefits of generating one megawatt-hour (MWh) of electricity from renewable sources. When a company purchases RECs, it essentially buys the rights to claim the environmental attributes of renewable energy, even if the physical electricity is not consumed on-site.

Bundled vs. Unbundled RECs

Bundled RECs: These RECs are combined with the physical electricity generated from renewable sources. When a company purchases bundled RECs, it receives both the electricity and the associated environmental attributes. This approach is often seen in PPAs where the renewable energy generated is consumed by the buyer.

Unbundled RECs: These RECs are sold separately from the physical electricity. Companies can purchase unbundled RECs independently to claim the environmental benefits of renewable energy without necessarily consuming the electricity generated. This flexibility allows companies to support renewable energy development and offset their GHG emissions regardless of their location or energy consumption patterns. These can be purchased under a virtual power purchase agreement (VPPA) or can be purchased directly from the private REC market.

REC Swaps: When installing onsite solar energy assets, the buyer can elect to “Swap” the bundled RECs for unbundled RECs. Through a REC swap, companies can tailor their REC portfolios to align with specific regulatory requirements, sustainability targets, or geographic preferences. By engaging in REC swaps, companies can optimize their costs by exchanging higher-cost RECs for lower-cost ones. However, Buyers need to take into consideration how they report GHG emissions before making this decision as different RECs could dilute the overall impact on renewable energy development and GHG reduction​.

What about Community Solar or Green Power Utility Programs? 

Whether community solar or green power utility programs comes with RECs depends on the specific program details. Companies should carefully review the terms of the proposed clean energy subscriptions to understand whether RECs are included. If the RECs are retained by the supplier, you cannot claim the GHG emission reductions. Without RECs, the renewable energy attributes belong to whoever owns the certificates.

Not All RECs Provide the Same GHG Impact

It is important that buyers understand the impact of one REC compared to another. The geographic location and local grid's energy mix of the REC source influences its impact; RECs from regions with high grid emissions (e.g., fossil fuel-dominated grids) provide greater relative GHG reduction benefits compared to those from cleaner grids. Buyers need to measure their specific location's consumption and relative GHG emissions and compare these values to the REC’s GHG impact value to understand and compare that against the REC being purchased from any offsite generation source. This comparison helps buyers determine how many RECs they need to effectively offset their GHG emissions. Onsite solar energy generation, however, has the added benefit of directly reducing a company's grid electricity consumption and GHG emissions at the source, providing a more straightforward and impactful solution for meeting sustainability goals.

RECs and GHG Reporting

RECs are instrumental in GHG reporting, particularly when companies aim to meet their sustainability targets. There are two methods of reporting that both have their merits and drawbacks. Market-based reporting allows for the use of RECs and can show a greater commitment to renewable energy, but it might not reflect the actual GHG impact as accurately as location-based reporting in some cases. In some locations, companies are required to report both metrics. Companies need to carefully consider which method aligns best with their sustainability goals and reporting obligations​ (GHG Protocol)​​​.

 

Location-Based vs. Market-Based Reporting

Location-Based Reporting

Location-based reporting reflects the average emissions intensity of the local grid where energy consumption occurs. It accounts for the mix of energy sources used to generate electricity in a specific geographic area. Onsite solar energy directly impacts location-based reporting by reducing the amount of electricity drawn from the grid, thereby lowering the overall emissions associated with a company's energy consumption. Offsite PPAs with bundled RECs and purchasing unbundled RECs have a limited impact on location-based reporting.

Market-Based Reporting

Market-based reporting, on the other hand, considers the specific energy purchases made by a company, including RECs. This method allows businesses to demonstrate their commitment to renewable energy by showing the proportion of their energy consumption that is sourced from renewable sources, regardless of the local grid's energy mix. By purchasing RECs, companies can effectively "green" their energy consumption and report lower GHG emissions, aligning with sustainability goals and regulatory requirements.

 

Integrating Onsite Solar Energy and RECs for Scope 2 Emissions

Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling. Onsite solar energy and RECs play a critical role in reducing Scope 2 emissions:

  • Onsite Solar Energy: By generating electricity on-site, companies can directly reduce the amount of electricity they purchase from the grid, thereby lowering their Scope 2 emissions. This has a direct and measurable impact on GHG reporting. Furthermore, companies can claim or retire the RECs from their onsite systems.
  • RECs: Purchasing RECs allows companies to offset the remaining grid electricity consumption not covered by onsite solar. This is particularly useful for achieving market-based reporting goals. By strategically selecting RECs from regions with high emissions intensity, companies can maximize the environmental benefits and further reduce their reported Scope 2 emissions.

 

Financial Benefits of Onsite Solar Energy

CapEx Model

  • Upfront Investment: Although it requires an initial investment, the CapEx model provides the highest return on investment over the system's lifetime.
  • Value:  Companies own the solar asset and its RECs, maximizing the energy savings and capturing valuable tax benefits while avoiding the capital interest cost. 
  • Free and Clear: CapEx asset purchases remove volatility from third parties or interest rate markets. 

CPACE Model

  • 100% Financed: Commercial Property Assessed Clean Energy (CPACE) program financing covers up to 100% of the project costs through property assessments. This enables businesses to undertake significant energy improvements without impacting their capital reserves or borrowing capacity.
  • Value: Companies own the solar asset and its RECs, maximizing the energy savings, capturing valuable tax benefits, while repaying for the system over the long term, typically up to 20 years. 
  • Off Balance Sheet and Non-Recourse: Repayments are made through property tax assessments, which are typically transferable upon the sale of the property. This structure can align payments with the energy savings generated, ensuring that the benefits of reduced energy costs are realized immediately while the costs are spread over time. Depending on the company's financial treatment it can be favorable to the Profit n' Loss and Balance Sheet.

OpEx Model

  • No Upfront Cost: The OpEx model, including PPAs and operating leases, allows businesses to adopt solar energy without the upfront investment or ongoing operational and maintenance expense.
  • Value: Companies can save on energy costs and opt to obtain the RECs from the onsite system. Depending on the company's financial treatment of leases it can also be favorable to the Profit n' Loss and Balance Sheet.
  • Operational Flexibility: The ongoing payments for solar electricity are predictable and can be budgeted as operational expenses, providing financial stability. Depending on the company's financial treatment of leases it can also be favorable to the Profit n' Loss and Balance Sheet.

 

Global and U.S. Reporting Requirements

International Reporting Requirements

Several countries already mandate both location-based and market-based GHG reporting. For example:

  • European Union: The EU's Corporate Sustainability Reporting Directive (CSRD) requires companies to report their GHG emissions using both methods.
  • Australia: The National Greenhouse and Energy Reporting (NGER) scheme requires comprehensive reporting, including location-based and market-based emissions.

These requirements ensure transparency and encourage companies to adopt renewable energy solutions like onsite solar and RECs to meet their GHG reduction goals.

U.S. Reporting Trends

In the United States, GHG reporting requirements are evolving. Although not yet mandated nationwide, there is a clear trend toward more stringent and comprehensive reporting standards. Agencies and initiatives leading this charge include:

  • Environmental Protection Agency (EPA): The EPA’s Greenhouse Gas Reporting Program (GHGRP) collects data on GHG emissions from large sources and suppliers in the U.S., setting the groundwork for future comprehensive reporting requirements.
  • Securities and Exchange Commission (SEC): The SEC is increasingly focusing on climate-related disclosures, pushing companies to provide more detailed and transparent reporting on their environmental impacts.
  • The Climate Registry: This non-profit organization provides consistent and transparent standards to calculate, verify, and publicly report GHG emissions into a single registry.

These efforts indicate a movement toward requiring both location-based and market-based GHG reporting in the U.S., aligning with global standards and encouraging more robust sustainability practices.

 

Conclusion

The integration of both onsite solar energy systems and Renewable Energy Certificates (RECs) offers a robust strategy for businesses aiming to meet GHG reporting requirements and achieve sustainability goals. By leveraging renewable energy sources companies can maximize their environmental impact, enhance their brand reputation, and contribute to a more sustainable future. As international and U.S. reporting standards evolve, the importance of adopting these practices becomes increasingly critical. At SolBid, Inc., we are committed to helping businesses harness the power of solar energy and navigate the complexities of national onsite solar energy deployment. Contact us today to learn more about how we can support your sustainability journey.

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Created By:SolBid