Accounting methods
There are two methods that are used to calculate scope 2 emissions; the location-based method and the market-based method.
The location-based method is based on statistical emissions information and electricity output aggregated and averaged within a defined geographic boundary and during a defined time period. This method applies in all locations since the physics of energy production and distribution functions the same way in almost all grids. It doesn’t matter the electricity provider that one chooses.
This method assumes that a company is using the average mix of energy sources in the local area. If on average, electricity in a given location comes from 50% coal, 30% renewables and 20% gas, emissions are based on that mix.
The location-based method allocates emissions using emission factors representing average emissions from energy generation occuring within a defined geographic area and a defined time period.
Emission factors are representative values used to estimate greenhouse gas (GHG) emissions from specific activities, processes, or products. They quantify the amount of GHG released into the atmosphere per unit of activity, like per kilowatt-hour of electricity consumed or per kilometer traveled.
The market-based method reflects the GHG emissions associated with the choices a consumer makes regarding its electricity supplier or product. These choices, such as choosing a retail electricity supplier, a specific generator, a differentiated electricity product, or purchasing unbundled energy attribute certificates, are conveyed through agreements between the purchaser and the provider.
Consumers have an option of purchasing bundled contractual instruments (contractual instruments plus energy) or unbundled contractual instruments (involves purchasing contractual instruments and electricity separately). Energy attribute certificates are an example of contractual instruments.
Under this method, an energy consumer uses the GHG emission factor associated with the contractual instruments it owns. In contrast to the location-method, this allocation pathway represents contractual information and claims flow, which may be different from underlying energy flows in the grid. The certificate does not necessarily represent the emissions caused by the purchaser’s consumption of electricity.
Unlike the location-based method that is applicable everywhere, the market-based method is only available in markets where energy certificates are available.
This method uses some of the same energy production and emissions data for any energy that is not tracked by an instrument. The emissions from all untracked and unclaimed energy comprise a residual mix emissions factor. Consumers who do not make specified purchases or who do not have access to supplier data should use the residual mix emission factor to calculate their market-based total. The calculation of market-based emissions considers zero emissions for documented renewables and uses the residual mix for the energy sourced from the grid. If the company does not buy green energy contracts, their market-based and location-based emissions will be similar.
Residual mix factors represent the emissions from electricity generation that are not specifically linked to individual contracts or renewable energy certificates. When companies claim to be using renewable energy (e.g., through energy attribute certificates), they essentially purchase the “green” attributes of electricity. The residual mix factor accounts for the emissions from the electricity generation that is not covered by these claims, preventing double-counting of renewable energy. The residual mix is often calculated by taking a country’s total electricity generation and subtracting the amount covered by renewable energy certificates and contracts. Residual mix factors provide a more accurate representation of a company’s overall impact, particularly in situations where they have purchased renewable energy certificates. They also help ensure that the emissions from unclaimed electricity are not misrepresented.
With the market-based method, individual energy consumers have the opportunity to make decisions about the product and supplier, which can be reflected as a supplier-specific emission factor or product-specific emission factor. A supplier-specific emission factor is a rate provided by an electricity supplier that reflects the greenhouse gas (GHG) emissions associated with the energy they provide to customers. The supplier-specific emissions factor is only used in the market-based method.
Companies should use both of these methods to report their emissions.
The location-based method shows the emissions based on what’s actually available in the electricity grid. Additionally, it helps with comparing companies in the same region fairly. It is also useful for governments and policymakers tracking overall emissions.
The market-based method shows the impact of a company’s own energy choices. It shows how much they are actually trying to be greener. If they buy renewable energy certificates, this method gives them credit for that. The market-based method encourages companies to invest in cleaner electricity. Even if the company physically uses electricity from a mixed grid, these certificates prove they are investing in renewables and can claim lower emissions.
There are three type of decisions that companies can make that impact overall electricity grid emissions.
1) Facility timing
A company’s decisions about where to locate its office, buildings, industrial facilities, distribution centers, or data centers carries GHG implications.
The physical location of these points of energy consumption impacts what existing, or future energy resources may be deployed to meet demand. For instance, locating new facilities on a GHG-intensive grid means that in the near term, energy demand will be met with a higher GHG emissions profile, assuming that the energy is consumed locally.
By contrast, locating operations in areas with low-carbon natural resources, or additional benefits such as natural ambient cooling or heat, can reduce these GHG emission risks.
Companies considering electric transportation fleets also need to ensure the availability of charging infrastructure and the GHG-intensity of the grids where that transportation would occur.
A company’s shift in facility location will result in changes in scope 2 based on:
Location-based: The use of a different grid average emission factor, and possibly a shift in energy supply overall, if the new location allows for on-site energy generation or is located near an energy development where a direct line connection can be made.
Market-based. Changes in supplier, in other types of contractual instruments, actions of other consumers in the market, or the residual mix used in that location.
2) Level of timing of demand
Once a company has established a location for its operations, it can reduce its emissions through reducing its energy demand. A company can reduce energy consumption through measures such as:
choosing an energy-efficient building;
carrying out energy-efficient retrofits;
using more energy efficient electronics or lighting; and
making behavioral decisions.
The location-based method assumes that local demand impacts local generation and distribution patterns, which ultimately impact total GHG emissions from the system, taking account physical energy imports/exports.
A company’s shift in energy demand quantity and timing will entail changes in reported scope 2 emissions, primarily through activity data. In both methods, a decrease in electricity consumption can decrease total reported scope 2 emissions.
Location-based: Collective changes in consumption contribute to changes in the grid average emission factor over time. Shifting energy consumption to periods with low-emissions generation on the grid (often non-peak hours) can further contribute to system-wide reductions.
Market-based: Reducing electricity demand can minimize the additional costs associated with contractual instruments.
3) Decisions to influence grid mix of generation technologies
There are various factors that impact the electricity mix on a given grid:
historical regulation,
finances,
physical characteristics of the jurisdiction, and
the current market dynamics of the demand and supply of particular resources.
An electric consumer can pursue a variety of actions to try influence these factors directly or indirectly, conveying stronger or weaker market signals. If consumers want to support low-carbon technologies, they can:
create on-site low carbon projects;
establish contracts that include certificates, such as PPAs directly with low-carbon energy to the company;
negotiate with their supplier or utility to supply low-carbon energy to the company;
switch to a low-carbon electricity supplier or electricity product, where available; and/or
purchase certificates from low-carbon generation.
Substantially changing a grid’s resource mix over time generally requires aggregate consumer decisions, or a large-scale corporate consumer representing a significant percentage of a utility’s load. Efforts to shift grid supply through procurement will entail changes in reported scope 2 emissions based on:
Location-based: The cumulative effect of consumer or supplier choices over time that change the grid average emission factor. Individual corporate choices regarding electricity contracts, supplier choices, or certificate purchases are not directly reflected in an individuals scope 2 inventories using the location-based method.
Market-based: Individual corporate choices of electricity product or supplier, or the lack of a differentiated choice, which requires the use of a residual mix.