Angie Soto Reaza
Managing Director
Nexus Energía Mx
/
Expert Contributor

How Are We Doing in Terms of the Energy Transition?

By Angie Soto Reaza | Wed, 07/20/2022 - 09:00

In recent years we have seen a significant change in the commitments of companies in terms of managing environmental, social and governance (ESG) factors. Companies began with the development of corporate social responsibility programs, which have evolved to deepen and establish metrics on environmental issues, sustainability, gender equality, transparency and regulatory compliance, all these concepts included under the acronym ESG.

In general terms, ESG programs seek to improve the quality of working life, promote equal opportunities, help the communities where the companies are located, improve transparency policies and reduce its carbon footprint.

Under each of the criteria, various tools have been developed, but those generated under environmental criteria are noteworthy, since recently they have flooded the markets with different types of products, services and certificates. Among the most common tools to mitigate environmental effects, stand out the following:

  • The installation of solar roofs

It is increasingly common for companies to decide to take advantage of solar resources by installing solar panels in their facilities to generate clean energy for self-consumption, improve the energy efficiency of their facilities and reduce direct emissions, i.e. " Scope 1” emissions as defined by the Corporate Accounting and Reporting Standard of the Greenhouse Gas Protocol (GHG Protocol).

  • The purchase of green energy

The companies have also decided to reduce their indirect emissions, corresponding to "Scope 2" of the GHG Protocol, by contracting suppliers that ensure the supply of energy produced through renewable sources by:

(a) entering into power purchase agreements (PPAs) with suppliers that guarantee the energy source, and

(b) purchasing clean energy certificates issued in accordance with nationally or internationally recognized methodologies.

The purchase of green energy is crucial for reducing emissions and meeting ESG metrics. For instance, in the International Energy Agency (IEA) 2019 report, the sectors with the most CO2 emissions were energy and heat producers with 42 percent of global CO2 emissions, industry at 19 percent, the transport sector at 24 percent and the residential sector at 6 percent.

 

Electricity and heat producers

Other energy industries

Industry

Transport

Residential

Commercial and public services

Agriculture

Fishing

Final consumption not elsewhere specified

TOTAL

%      2019

42%

5%

19%

24%

6%

2%

1%

0%

0%

100%

Mt CO2 2019

14,068

1,694

6,254

8,222

1,969

825

407

20

162

33,621

 

So, a way to reduce CO2 emissions is the consumption of energy produced by renewable energy sources. The relevance of adjusting the energy matrix should not be overlooked, as it represents the largest share of global emissions. An example of the importance of the energy matrix, is the difference in the emissions produced by an electric vehicle in Mexico compared to Canada. The emission factor in the Mexican national grid is 0.423 tCO2eq /MWh (SEMARNAT, 2019), compared to Canada’s emission factor, which is 0.12 tCO2eq /MWh (Carbon Footprint, 2020). Therefore, as of today using an electric vehicle in Mexico is 80 percent more polluting than using a fuel vehicle in Canada.

The relevance of energy consumption has led to the creation of many certificates guaranteeing the supply of green energy. Among those certificates it possible to list: (i) the clean energy certificates issued in Mexico (CELs), (ii) I-RECS issued in accordance with the protocol of The International REC Standard Foundation, (iii) RECs issued by the RECS Energy Certificate Association, and (iv) guarantees of origin (GdOs) issued in accordance with current legislation in the European Union.

Those mechanisms are capable of tracking, by using different methods (including blockchain), details of the energy being certificated, the technology of the power plant, and the location and year of the production, while also avoiding the risk of double counting.

The alternative of purchasing these certificates has been popularized, as it is a solution easy to understand, since 1 I-REC (or certificate) is equal to 1MWh of energy generated and certifies 1 MWh of energy consumed. So, there is a growing participation of companies, with the pioneers being some of the largest ones, such as those that make up the RE100 Climate Group.

  • Participation in the emission reduction market.

However, it is clear that the voluntary efforts of companies are not enough to address the climate challenge. Due to the above, most countries have developed various public policies to accelerate the energy transition and mitigate the effects of climate change. Among these efforts are the development of mandatory Emissions Trading Systems (ETS) or the establishment of taxes on coal.

Each of these mechanisms presents some challenges. For example, it is difficult to measure the effectiveness of carbon taxes, since as of this date there is no clear baseline regarding the emissions corresponding to each of the sectors. Therefore, it is difficult to accurately measure the impact of carbon taxes in terms of emission reductions. On the other hand, the ETS cannot address all of the complex factors that drive climate change, making electricity more expensive alone.

Although it is desirable that the administration of a country be the main promoter of an energy policy with clear decarbonization purposes and that it be capable of leading the energy transition of the country in an orderly manner, it is widely known that today there are many mechanisms that can be implemented by companies without government intervention. Today, public policymakers face the challenge of designing systems that are inclusive and ensure a fair transition but they also face a market in which both financial entities and investors no longer expect subsidized sustainability projects but only projects that are developed in an environment of legal certainty, which is undoubtedly the responsibility of the state.

The main actions that need to be taken for an effective energy transition lie within the energy sector. Actions within the “Scope 2” of emissions reductions are so important because power and heat generation represent 42 percent of the CO2 emissions of GHG in the world. [1] The purchase of green energy is particularly relevant as it is easy to purchase the different types of existing certificates. There is so much work to do to achieve emissions reductions within scope 1, 2 and 3, but I would suggest starting with actions targeting reductions within scope 2 as it is the easiest way to change the energy matrix and combat climate change. The time is NOW.

 

[1] Source: IEA Greenhouse Gas Emissions from Energy link

Photo by:   Angie Soto Reaza