RECs or green microgrids? What’s the better way to achieve ESG goals?

With the value of renewable energy certificates (RECs) being challenged, green microgrids and on-site energy are being eyed as a better way to achieve not only sustainability goals but also resilience.

A new study published in Nature finds that corporate REC purchases aren’t likely to prompt additional renewable energy production, which is key to fighting climate change.

Corporate science-based targets to reduce emissions aim to meet the global temperature goal of the Paris Agreement,  said the study by UK and Canadian researchers. To date, more than 1,000 companies, including multinational firms, have set these targets for their environmental, social and corporate governance (ESG) goals.

The use of RECs by companies with these targets has created an inflated estimate of the effectiveness of mitigation efforts, according to the study. The researchers calculated that when they removed the Scope 2 emission reductions the companies claimed for 2015-2019, the companies no longer meet the Paris Agreement’s 1.5 degree centigrade goal, and barely fall below the 2 degree goal.

Scope 2 emissions are indirect greenhouse gas emissions that result from the purchase of electricity, steam, heat or cooling, according to the US Environmental Protection Agency.

Study finds RECs misleading

If the trend continues, the study said, 42% of Scope 2 emission reductions won’t achieve the goal of mitigation. When companies say that Scope 2 emissions can be cut with RECs, it’s misleading because the RECs aren’t associated with real emission reductions, said the study.

Bobby Hollis, vice president of market strategy for Mainspring Energy — which offers multifuel generators that can serve as green microgrids — said that the best option for corporations is to install clean on-site generation. RECs can be based on renewable power plants located far from the site and won’t benefit a local community. And they can be from older plants built some years ago, so when companies buy these RECs, they don’t add new renewable energy to the grid, Hollis said.

“With clean generation on that site, you control your own destiny and hopefully have more resilience. You don’t have to worry about what’s going on 100 miles from your site; it’s just what’s impacting you directly,” Hollis said. “You don’t have to worry about when it’s generated, you don’t have to worry about the geography. It takes out the variables,” he added.

However, not all RECs lack value, said Hollis.

What constitutes high quality RECs

The highest quality RECs come from new renewables. When companies buy RECs, they want to be sure their money goes toward building new renewable plants so that more clean energy is added to the grid. The plants should be located close to the corporation purchasing the RECs. And it’s important that RECs are based on renewable energy plants that are generating now, he said.

Clark Wiedetz, chief sales officer at GreenStruxure, a subsidiary of Schneider Electric, agreed that companies should be careful about purchasing RECs from renewable plants located in other states. This often involves virtual power purchase agreements (PPA). “A virtual power purchase agreement is OK for a company’s short-term goals,” he said. “On-site microgrids are great for long-term goals.”

“We are seeing large companies especially evaluate their sites and target their highest impact sites from an economic and sustainability standpoint for their first on-site projects, then continue from there and supplement the rest with virtual PPAs,” said Wiedetz.

Pierson Stoecklein, chairman of the Microgrid Resources Coalition, said that without restrictions on where the renewable energy is generated, companies can procure enough RECs to satisfy a 100% renewable energy commitment without modifying their energy consumption or reducing emissions at or near the company.

Green microgrids, on the other hand, which are local resources, ensure that emissions reductions are realized within the immediate vicinity of energy consumption, Stoecklein said.

Microgrids add resilience

And the real value of microgrids is the resilience they provide, which isn’t provided by RECs, he added.

However, the Securities and Exchange Commission (SEC) recently proposed climate disclosure rules that may affect ESG efforts as they relate to resilience, said Stoecklein.

“Until now, an entity’s ESG commitments may largely have ignored or at least not explicitly addressed resilience,” he said. But the SEC’s proposed rules would require disclosure of information about topics related to climate threats and how a company addresses resilience. For example, companies now have to disclose how any climate-related risks have affected or are likely to affect a company’s strategy, business model and outlooks.

One major US bakery company, Bimbo Bakery — maker of Thomas’ English muffins, Arnold bread and Sara Lee pastries — is choosing the microgrid route for meeting ESG goals. To help reduce its carbon footprint, the company plans to install microgrids at six manufacturing facilities over the next year with the help of GreenStruxure.

That may be a better strategy than purchasing RECs, given the questions swirling around RECs.

According to the authors of the REC report, existing emission accounting standards allow corporations to claim emission cuts by purchasing RECs. This accounting standard assumes that certificates will lead to increased investment in renewable energy generation and will cut emissions from electricity production.

“However, existing research finds very limited empirical evidence supporting this assumption. Corporate purchasing of certificates can therefore lead to inflated estimates of emission reductions,” said an article from the authors of the report.

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