Innovation & Technology

From Silicon Valley to Rural Africa:
Boosting Energy Access with the D-REC Initiative

The potential for D-RECs as an instrument for transformative change is limited only by the corporate appetite for renewables, which at this point sees no signs of waning. While the infrastructure is currently being built and finalized, the chance to funnel investments is just around the corner.

Sponsored Content | / This article is sponsored by South Pole | Published 3 years ago | About a 11 minute read

Image: IRENA

Summary

Many companies are looking beyond their headquarters for opportunities to support renewable energy deployment, to maximize their social and climate impact. Yet despite corporate ambitions, few mechanisms have existed to enable investment to connect a company’s ambitions with the most vulnerable and disadvantaged (and often off-grid) regions that make up the bulk of the 759 million people currently without access to electricity. Taking this problem into focus, Decentralized Renewable Energy Certificates (D-RECs) expand on existing market instruments and present a new way to certify and value the environmental attributes of distributed or off-grid renewable electricity, with a focus on emerging markets.

This piece explores the role of D-RECs in allowing companies to achieve social and climate impact in off-grid communities, which are the source of important materials in their supply chains. Several real-world examples are cited of leading companies that have demonstrated their commitment to renewable energy, while the persisting challenge of enhancing energy access in the communities that need it most is explained. By following the journey of a hypothetical “Company X” and the impact D-RECs can have on “Village A,” the piece illustrates the potential for D-RECs as an instrument for transformative change with potential to unleash climate-mitigation and social-development potential at the same time.

The IPCC's Sixth Assessment Report makes it abundantly clear that we need to immediately and dramatically ramp up global climate action. It also underscores the relevancy of climate action to achieving the UN Sustainable Development Goals (SDGs). One of the most closely linked SDGs is to ensure access to affordable, reliable, sustainable and modern energy for all — and especially for the 759 million people who still lack access to electricity. It is here where renewable energy access holds great potential.

Corporate renewable energy procurement is becoming a dominant global force when it comes to increasing renewable capacity. Many companies are looking beyond their headquarters for opportunities to support deployment of renewables as a way to maximize their social and climate impact. This approach offers great potential to reduce emissions by displacing dirtier forms of energy such as diesel, or to build new renewable capacity and avoid emissions that would have taken place in the future. It can also improve energy access in countries where it is desperately needed, which in turn brings a slew of benefits.

Image credit: United Nations Department of Economic and Social Affairs

The problem, however, is that despite these companies’ ambitions, few mechanisms have existed to enable investment to connect a company’s ambitions with the most vulnerable and disadvantaged (and often off-grid) regions that make up the bulk of the 759 million mentioned above. For companies wishing only to meet their commitments to shift their own energy demand towards renewable energy, PPAs or RECs have allowed this to happen. But for companies interested in bolstering renewable energy deployment that can also contribute to developing the small-scale, distributed and off-grid renewable energy sector — for example, in a community located near the source of a key raw material — there simply has not been a scalable and trusted mechanism to enable this kind of engagement.

What are decentralized renewable energy certificates (D-RECs)?

The concept of a D-REC is based on ‘regular’ renewable energy certificates (RECs), which are used by many companies to credibly ‘green’ their electricity supply. RECs allow electricity buyers to make reliable claims about their energy usage by transparently tracking a unit of electricity from its origin through to its use or redemption, which in turn also adds additional value to each unit of renewable energy. This tracking process takes place for electricity within the grid, but until now the concept has not been able to be applied to off-grid systems.

D-RECs expand on this tested market instrument and present a new way to certify and value environmental attributes of distributed renewable electricity, with a focus on emerging markets. This means focusing on renewables that are not connected to the grid — such as solar mini-grids — in places that are desperate for energy access, like rural communities near environmental commodities. Ultimately, D-RECs are a way to unlock capital by connecting emerging markets and the higher risk of the distributed renewable energy (DRE) sector with more mature markets comprised of investors seeking environmental and social impact, thereby unleashing climate-mitigation and social-development potential at the same time.

Importantly, companies and developers aren’t starting from scratch with D-RECs; RECs, Guarantees of Origin (GOs), Tradable Instruments for Global Renewables (TIGRs), and other such electricity market instruments have become powerful catalysts driving investment into renewables in many markets, and D-RECs make use of this type of tested mechanism to target investment to meet needs in remote communities while helping companies address hard-to-reach scope 2 and 3 emissions.

For those wishing to dive into the technical details, there are resources available that go into greater detail about how exactly D-RECs work. Here, we will further explore the why and the way that D-RECs seek to fundamentally change renewable energy development — and for that, we introduce Company X.

The journey of Company X

Let’s assume that Company X is a large player in the global tech industry. As climate consciousness grows worldwide and options for sustainable investments multiply, they, like many others, are looking for corporate engagement and investment opportunities that align with their priorities and values. One of the more common approaches to date has been through nature-based solutions, or to source carbon credits from projects with specific community impacts such as the Kariba project in Zimbabwe. Until more recently, carbon credits from projects like these have been the main focus for companies seeking social impact for their climate investments. To complement this approach, D-RECs come in to offer a unique mix of impact and benefit, and offer a new way for climate leaders to address their own emissions while also accelerating the energy transition in developing and emerging markets. Greater electrification — itself part of SDG 7 — can contribute to many of the other SDGs by enabling more income-generating opportunities, improving access to healthcare services, improving education and food security, and helping to fight climate change. But the world is still far short of the US$45 billion of annual investment needed to achieve SDG 7 targets.

Like its industry peers, Company X has become increasingly conscious about its energy usage and the impact on carbon emissions that can be realized by switching to renewables. Industrial production facilities make up the largest share of emissions from energy end-uses. Recognizing this, many multinational companies, such as the members of RE100, are committing to using 100 percent renewables to drive down their carbon footprint. This includes, for example, companies including Microsoft and Google broadly focusing on renewables; or Oracle focusing on renewables while pressuring suppliers to reduce supply chain emissions as well. Companies making commitments like these are not just targeting emissions from their direct energy usage (e.g. from using coal or diesel on site — aka scope 1 emissions) but also from their indirect energy usage (scope 2, from things including electricity or heat generated offsite but procured and used by them; and scope 3, from activities along their goods’ value chains). Apple played a driving role to make available RECs in Taiwan so its supplier can credibly procure renewable energy. But targeting scope 2 and 3 emissions can be “challenging, because their suppliers are in markets where the local renewable energy capacity isn’t in place” (Quartz). This is a challenge that can be solved with D-RECs, which provide a robust way for companies to target impactful renewable energy even in their supply chains.

In 2019, the corporate demand for renewable energy has already helped install 19.5 GW of capacity in 23 countries that would not have been installed otherwise, and in 2020 corporations bought almost 24 GW of clean energy. But most of this renewable energy development and procurement is limited to North America and Europe. If even a fraction of this amount were to be installed in emerging markets with energy deprived societies, the resulting climate and accompanying social benefits would be enormous!

With corporate examples like these to follow, Company X has also come to realize how access to renewable energy can catalyse social & economic development in low-income communities — such as those that produce the company’s raw materials and make their entire industry possible in the first place. Company X commits to source 100 percent renewable energy across its operations, and to go above and beyond by focusing on D-RECs to target emissions and generate social benefits across its supply chain. Company X makes an up-front purchase of D-RECs, one of several ways D-RECs can drive capital flows. Due to this upfront commitment, a DRE project developer is now able to obtain the financing needed to develop a mini-grid system for Village A, where the workers who help mine the materials for Company X’s products reside.

The story of Village A

Many of the community members of Village A, located in East Africa, belong to the 759 million people that still lack access to electricity. There has been some success with renewable energy rollout in their country, but it has occurred mostly through grid-tied, utility-scale projects. Village A, however, is far from the grid; in most homes, light is provided by candles or dirty-burning kerosene, while some of the other facilities rely on imported diesel.

Access to healthcare has been a particular issue in the village. They have a clinic, but the diesel generator that the clinic relies on is unreliable and unhealthy. Vaccines have gone bad due to intermittent refrigeration, and the noise and fumes are disturbing to patients. It is one of 60 percent of health facilities in 78 low- and lower-middle-income countries that lack access to reliable electricity.

Village A also happens to be within the same country as some of the mining operations that extract raw materials used by Company X. The pre-purchase of D-RECs by Company X allows the developer to obtain other sources of capital, and a new project is planned for Village A. The project aims to install a solar array next to a local health clinic. In addition to the social benefits that will be unlocked, the new alternative to diesel generators and kerosene lanterns will contribute to emission reductions for the country.

The technology making D-RECs possible

The technology underpinning D-RECs can be summed up as follows:

Off-grid solar panels generate electricity and deliver it to households and businesses in a community, often via a mini-grid or other small-scale system

A digital tracking component of the device sends generation data to the D-REC platform

The D-REC platform validates the generation data using a “digital twin” approach and if accurate, submits the generation data to an internationally-recognized issuing body (e.g. I-REC Standard, Gold Standard)

The issuing body validates the data and certifies the issued D-REC

Each D-REC is sold to a buyer, possibly through a designated marketplace

Proceeds flow back to the project developer, the owner of the electricity-generation facility, and/or community.

The next instrument for transformative change

At the end of the day, investments using D-RECs are investments into renewable energy projects with high climate impact and social benefits. In the decentralized communities that D-RECs benefit, the impact of better access to healthcare, improved education, or new business opportunities can be significant. The indirect partnership between Company X and Village A through D-RECs is part of a positive feedback loop, where project developers have a stronger income stream to work with to de-risk investments in more communities; while greater prosperity in Village A results in more customers reliably purchasing power —all leading to more renewable energy rollout, and all while Company X has verifiable results to point to as a result of its investment.

This feedback loop is already beginning; and the D-REC Initiative is currently targeting new investment of USD$100m/year by 2024, which would be about 0.2 percent of total corporate-driven renewable capacity annual installations. This would mean 100+ MW of additional renewable capacity deployed, 250,000+ tonnes of carbon reductions, and 500,000+ sustainable livelihoods improved in underserved communities.

Image credit: South Pole

The potential for D-RECs as an instrument for transformative change is limited only by the corporate appetite for renewables, which at this point sees no signs of waning. While the platforms to enable D-RECs are currently being built and finalized, the chance to funnel investments is just around the corner.

To help the D-REC Initiative seize this full potential, get in touch to learn how to make your own investment or to fund the Initiative and enable its development.