Arne Olson is senior partner, Nick Schlag is partner, Greg Gangelhoff is associate director, and Anthony Fratto is managing consultant at the consulting firm Energy and Environmental Economics (E3).
Much attention has been paid recently to the question of how to account for carbon emissions in clean electricity purchases. The Treasury Department is writing rules to meet the requirements of the Inflation Reduction Act, which includes a 10-year Production Tax Credit (45V) for clean hydrogen. In addition, the Greenhouse Gas Protocol is reevaluating methodologies used to account for emissions from voluntary purchases under its Scope 2 Guidance. Some advocates have argued that only purchases from supplies that are matched with demand on an hourly basis should be considered “clean.”
At stake is whether clean electricity purchases will continue to play a role in achieving emissions reductions. Matching 100% of electricity consumption with clean electricity production on an hourly basis may be a superficially attractive way to ensure clean electricity purchases are carbon-free. But it would be prohibitively expensive to achieve for all but the most flexible of loads because it requires them to become electrical “islands,” cut off from the benefits of transacting in wholesale electricity markets. Mandating it widely would impede the energy transition by stifling the development of the clean hydrogen industry, smothering the voluntary market for clean electricity purchases and needlessly increasing costs in compliance markets.
Rather than creating archipelagos of electrically-islanded consumers, policy should focus on developing a commoditized, national market for clean electricity that can achieve the scale needed to meaningfully mitigate the climate crisis.
Clean electricity purchases have contributed significantly to industry growth
California enacted the United States’ first renewable portfolio standard in 2002, heralding a new era in clean energy policy in which states would drive industry growth by creating demand through procurement mandates. Because power delivered over a networked electricity system cannot physically be tracked, renewable energy certificates, or RECs, were invented to demonstrate renewable energy content in power purchases.
Organizations were established to track REC creation and ownership. Broker markets for bilateral REC trading sprang up, enabling buyers to balance variations in energy sales and renewable energy production and providing a mechanism for voluntary purchases, which began to grow as costs declined and companies established sustainability goals.
Purchases of clean electricity have been a significant driver of renewable energy growth. However, current clean electricity markets in the United States are fragmented and inefficient due to a superfluity of eligibility requirements, meaning that consumers’ dollars aren’t achieving as much carbon reduction as they might. Hourly matching would atomize them by requiring individualized products for each consumer.
Clean energy content is closely related to carbon savings
While RECs represent clean energy attributes, carbon savings depend on which generators are “on the margin,” i.e., will reduce production as clean energy is added. This varies by time and location, meaning that emissions reductions from clean energy generation will not precisely match emissions increases from electricity consumption, unless they occur at the same time and in the same location.
Some have argued this mismatch invalidates the use of RECs, which are typically not time-specific, for demonstrating carbon reductions. However, incremental clean energy displaces natural gas generation in most cases in the United States today and will increasingly do so in the future. In the PJM Interconnection in 2022, gas was on the margin in 75% of hours.
As the energy transition progresses, there will be more hours when a clean resource is on the margin because the system cannot absorb all available clean generation. However, increasing the REC supply requires generating an additional MWh when clean resources are not on the margin, i.e., when a fossil generator is on the margin. Developers have a powerful incentive, regardless of the accounting framework, to invest in projects that can generate during times when the grid is not already saturated with clean energy.
Recent E3 research compared the hourly marginal emissions rates during hours with (a) economic hydrogen production, and (b) renewable energy production, across a range of renewable energy portfolios. The study demonstrated that annual accounting approaches do not necessarily result in higher carbon emissions than hourly approaches, and often result in lower emissions. While hydrogen production sometimes occurs in hours with high marginal emissions rates, it also increasingly occurs during hours with excess clean energy.
Clean electricity purchases result in additional supplies as long as demand exceeds supply
The concept of additionality is important for ensuring that individual actions create real carbon savings. In practice, however, demonstrating that purchased clean energy would not exist in the absence of the purchase is impossible because it requires a comparison to an unknowable counterfactual. Yet conceptually it is apparent that if demand for clean energy exceeds supply, then incremental demand requires a one-for-one increase in supply and additionality is achieved. If the available supply of clean energy exceeds demand, then incremental demand is absorbed by the existing supply, and additionality is not achieved. In today’s fragmented market, the supply-demand balance varies by product.
Some argue that hourly matching is necessary to ensure additionality. This view is supported by a recent Princeton Zero Lab study which concludes that annual matching does not create additional clean energy because of a durable surplus of clean energy supply relative to demand. However, this outcome is driven by two debatable assumptions: (1) clean energy prices that are always lower than conventional energy (requiring a sharp reversal of recent trends), and (2) no change in clean energy demand despite lower prices.
The second assumption is particularly problematic; demand for clean energy is strongly price elastic, meaning that low prices would lead to higher clean energy demand (and conversely that higher prices would shrink demand). It is too soon to conclude definitively that clean energy demand no longer creates new supply and toss aside the demand-stimulating policies that have grown the industry over the past 20 years.
Hourly matching is expensive and risky
Advocates make sweeping statements that “hourly matching is feasible” and “in use today.” But the existence of a few examples does not demonstrate that it is achievable at scale. Hourly matching effectively forces clean energy purchasers to become electrical “islands” that must balance their own loads with clean energy during each hour of the year. This is extraordinarily difficult to accomplish, especially for small island grids, and would create significant regulatory and financial risks.
Consumers would have two compliance paths: (1) contracting directly with a specific clean resource and dynamically adjusting their hourly consumption to match its production, or (2) after-the-fact purchases of time-stamped credits, without knowing whether enough would be available to satisfy all demand. Most electric loads are not flexible enough to modulate their operations based on the vagaries of the weather, leaving them at the mercy of an unworkably illiquid market for 8,760 different hourly REC products.
Nearly all studies of 100% clean energy systems have concluded that new clean firm technologies are needed to serve load during extended periods when wind and solar generation are not available. Announcements for “24/7” clean energy to date have been supported by existing hydro or nuclear power. It is noteworthy that the most prominent proponent of 24/7 clean energy supplies is targeting 2030 for actually achieving it.
Hourly matching leads to inefficient consumption decisions
Society benefits when energy consumers change their behavior in response to varying grid conditions, reducing consumption during times of scarcity and increasing it during times of plenty. Hourly matching would isolate clean energy buyers from electricity markets, creating inefficient outcomes such as flexible electrolyzers operating during peak hours because their contracted clean energy supplies are available, even as market prices and grid carbon intensity are high.
The last 25 years have seen the rise of competitive wholesale electricity markets across most of the United States based on the principal value proposition that pooling together diverse loads and resources provides significant benefits. Much effort has recently been expended to enable retail customers to participate in these markets, and to develop innovative rate designs that encourage load flexibility. Requiring hourly matching for flexible hydrogen production ironically negates these efforts for the very loads that are best positioned to act on them.
Where to go from here: a commoditized national market would help clean energy achieve the necessary scale
Consumers should have the tools they need to pursue hourly matching on a voluntary basis, but real harm would come from imposing it broadly. Requiring all clean energy purchasers to become electrical islands may be the best way to prevent a single pound of carbon from being emitted in serving their loads, but such a policy would be “pound-wise and ton-foolish,” resulting in significant contraction of the voluntary market, higher costs of renewable portfolio standard compliance and, ultimately, higher carbon emissions.
Instead of renouncing wholesale electricity markets and demand-stimulating policies, policy should build on them by creating a liquid, national market for clean energy. A national market would get the most carbon reductions from scarce consumer dollars by leveraging clean energy supplies where their cost is lowest, grid integration is smoothest, and transmission upgrades are minimized. A national certificate would serve as the “Henry Hub of RECs,” providing a visible and bankable market signal for the value of clean energy while stimulating demand for it through low prices and low transaction costs. Indeed, commoditization of the clean energy attribute, rather than expensive and complicated bespoke products, is what will enable clean electricity to scale rapidly to the levels needed to significantly address the climate crisis.