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.
the exciting potential of cultivated, fermented and plant-based protein innovation
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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.
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Sustainable Brands Staff
Published Oct 22, 2021 8am EDT / 5am PDT / 1pm BST / 2pm CEST