Setting scope 2 boundaries
The first step in creating a GHG emissions inventory is to determine the organisational boundary. The organisational boundary determines which facilities, business units, or activities should be included in a company’s GHG inventory and reporting. Organisational boundaries are set using consolidation approaches. A company can choose one of the three consolidation approaches for defining its organisational boundary for the entire corporate inventory, including equity share, financial control and operational control. A consistent consolidation approach should be used over time for the entire inventory.
The next step is to define the operational boundary. The operational boundary differentiates between emissions directly produced or controlled by the organization (direct emissions) and those emissions that are as a result of the activities of the reporting company, but occur at sources owned or controlled by another company (indirect emissions). Direct emissions are considered scope 1 while indirect emissions include scope 2 and scope 3. Scope 2 includes emissions from energy purchased or acquired and consumed by the reporting company, while scope 3 emissions include upstream and downstream value chain emissions.
Scope 2 is an indirect emission category that includes GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling consumed by the reporting company. GHG emissions from energy generation occur at discrete sources owned and operated by generators that account for direct emissions from generation in their scope 1 inventory. Scope 2 includes indirect emissions from generation only. Other upstream emissions associated with the production and processing of upstream fuels, or transmissions or distribution of energy within a grid, are tracked in scope 3, category 3 (fuel-and-energy-related emissions not included in scope 1 or scope 2).
Once energy is generated, it is either:
consumed on-site,
distributed to another entity by direct line transfer, or
distributed to consumers through the electricity grid.
These pathways, along with any contractual and/or certificate sales from electricity generation from owned or operated equipment, determine how the emissions from energy generation are accounted for and reported by different entities in scope 1 and scope 2. Scope 2 emissions are accounted for when a company :
obtains its energy from another entity, or
when a company sells an energy attribute certificate from owned and consumed generation.
There are four different scenarios that companies need to consider to determine which scope category their electricity consumption falls into.
Scenario 1: Consumed electricity comes from owned/operated equipment.
If energy is produced and entirely consumed by the same entity, with no grid connection or exchanges, these emissions should be reported in scope 1. No scope 2 emissions should be reported.
This scenario may apply to large industrial facilities that generate their own energy on site in owned/operated equipment.
Scenario 2: Consumed electricity comes from a direct line transfer.
In this scenario, energy is generated by a third party and all of it is directly transferred to the reporting entity. A case example is when a generator (e.g solar array or fuel using natural gas) owned and operated by a third party is located on the reporting entity’s premises. Another example is an industrial park or collection of facilities, where one facility creates electricity and transfers it directly to a facility owned or operated by a different party.
The company with operational or financial control of the energy generation facility should report these emissions in their scope 1, following the operational control consolidation approach, while the consumer of the energy reports the emissions in scope 2.
Any third-party financing institution that owns but does not operate the energy generation unit should not account for any scope 1, 2 or 3 emissions from energy generation under the operational control approach, since they do not exercise operational control. Only the equipment operator should report these emissions in their scope 1 following an operational control approach. However, equipment owners would account for these generation emissions in scope 1 under a financial control or equity approach.
If all the energy generated is consumed by the reporting entity, then the reporting entity’s scope 2 emissions will be equivalent to the generator’s scope 1 emissions.
Scenario 3: Consumed electricity comes from the grid.
This is the most common scenario. Most consumers purchase or acquire some or all their electricity through the electric grid. Depending on the design of the grid, there may be a small number of central generation facilities providing energy to many consumers, or there may be a large number of generation facilities representing different technology types e.g. thermal power using coal or natural gas inputs, or wind turbines, solar photovoltaics cells, solar thermal, etc.
Electricity generators report any emissions from generation in scope 1, but most renewable or nuclear technology would report “zero” emissions for these generation units.
Scenario 4: Consumed electricity comes from owned/operated equipment and some is purchased from the grid.
Some companies own, operate, or host energy generation sources such as solar panels or fuel cells on the premises of their buildings or in close proximity to where the energy is consumed. This arrangement is often termed as “distributed generation” or “on-site” consumption, as it consists of generation units across decentralized locations, often on the site where the energy output will be consumed, as opposed to utility-scale centralized power plants. The company may:
consume some or all of the energy output from these generation facilities;
sell excess energy back to the grid;
purchase additional grid power to cover any remaining energy demand.
The owners/operator of a distributed generation facility may therefore have both scope 1 emissions from energy generation, as well as scope 2 emissions from any energy purchased from the grid, or consumed from on-site generation where attributes such as certificates are sold.
The flux of electricity coming in or flowing out makes the process of determining the activity data a bit challenging. Many markets utilize ‘net metering’ for these systems, which allow grid purchases to be measured only as net of any energy exported to the grid.
Net metering is a billing mechanism that allows homeowners with solar panels or other renewable energy systems to offset their electricity consumption by sending excess energy back to the grid, earning credits on their utility bills. These credits can then be used to offset future energy consumption when the system produces less power, for example, during cloudy days or at night.
For accurate GHG accounting, companies should use the total (or gross) electricity purchases from the grid rather than grid purchases ‘net’ of generation for the scope 2 calculation. A company’s total energy consumption would therefore include self-generated energy (reflected in scope 1) and total electricity purchased from the grid (reflected in scope 2).
For example, assume a company produces 100 kWh of energy on site. It consumes 50% of this energy (50 kWh) and exports the rest (50 kWh) to the grid. Also assume that the company purchases additional energy (70 kWh) from the grid. The total energy consumed by the company and the net grid consumption can be calculated as follows:
