Kathryn Meng Elmes
State of the Market: Renewables Procurement, Scope 3, and Carbon Credits
GreenBiz and the Clean Energy Buyers Association (CEBA) convened climate action leaders in San Jose for VERGE22 and CEBA Connect last week.
Everyone from clean energy developers, to buyers, financiers, and advisors were aligned on one thing; the market is ill-prepared to meet the insatiable demand for clean energy and other footprint-reducing solutions prompted by unprecedented SBTi, net zero, or other ESG commitments. Keep reading for our key takeaways.
Corporate demand for clean energy is insatiable
Renewables procurement was top-of-mind for many of those in the audience. Thanks to programs like RE100, hundreds of businesses have committed to relying on 100% renewable energy. Procurement challenges are an unintended result as clean energy development fails to keep pace with rapidly growing demand. Businesses are competing to procure renewable energy, especially via virtual power purchase agreements (VPPAs). The winning bidders are primarily large investment-grade corporates. A huge swathe of the market remains unserved.
The renewables market has shifted from a buyer’s market to a seller’s market
Demand has outpaced supply. Developers are racing to satiate demand, while navigating ongoing supply-chain challenges, rising interest rates, lengthy interconnection and permitting queues, and more. The majority of buyers are toiling with how to successfully procure renewable energy as most of the market is unrated or sub-investment grade, including those procuring energy through third-party platforms, on behalf of franchises, or via subsidiaries.
Credit presents a significant barrier to scaling clean energy procurement
According to the Clean Energy Buyers Association, “only 23 percent of the most mature U.S.-listed companies have sufficient credit ratings to support the development of large-scale offsite clean energy projects.” Lauren Tatsuno from 3Degrees, Harry Singh of Goldman Sachs, and Brooke Malik of Apex Clean Energy spoke to four common, but imperfect solutions; leveraging existing banking relationships, credit sleeves, posting high amounts of credit, and PPA terms flexibility. Developers, buyers, financiers, and advisors emphasized the limited success they have had with these approaches, the persistence of credit barriers, and the need for more solutions.
Scope 3 is the next frontier
Those lucky enough to be able to tackle their scope 1 and 2 emissions are now increasing their focus on scope 3 emissions. Approximately 80-90% of overall emissions stem from supply chains. These emissions fall outside of the direct control of procuring entities, yet they fall within the scope of influence. Supplier engagement, education, and enablement are key. Only a fraction of companies are actively engaging with their supplier base today in an effort to decrease emissions. Entities like OneTrust provide footprint calculating tools and are working with procurers and suppliers to make reporting easier. Companies like Meta have developed support programs for their suppliers. These programs are critical for ESG success as approximately 98% of Meta’s emissions stem from scope 3 from their many suppliers providing building materials, technology for data centers, professional services, and more. Suppliers most often begin with renewable energy procurement, employee training, and energy efficiency programs. Unfortunately, credit barriers resurface here, too, as an estimated 70%+ of suppliers for major corporations are sub-investment grade or unrated. Panelists acknowledged that financing is a key barrier for suppliers. Without targeted financing and credit support, a minority of suppliers will be able to address even their scope 1 and 2 emissions.
Carbon credit investments are ramping
As the mitigation hierarchy teaches us – those in a position to eliminate and reduce emissions should do so, and then consider the role carbon offsets can play in mitigating their remaining footprint. Corporates, startups, NGOs, scientists, multilateral public and private institutions are endeavoring to bring clarity, guidance, and liquidity to carbon markets. Innovators, registries, and verifiers are focusing on how to deliver high-quality nature-based and engineered carbon credits. Early adopters are already purchasing credits or making commitments. Most prospective buyers are keeping an eye on carbon market movements, while first improving the efficiency of their operations, electrifying where they can, and procuring clean electricity to the maximum extent possible.
Collaboration is critical
The structural market challenges present in clean energy and efficiency markets cannot be solved unilaterally. We were pleasantly overwhelmed by requests for support and collaboration. Buyers need credit support. Developers need more affordable financing. Financiers need more projects to invest in. Advisors need tools in their kits to support buyers when they run into procurement barriers. Our team at Energetic Insurance solves alongside developers and financiers every day. We are increasingly interested in hearing directly from buyers and supporting their procurement needs.
Have questions on how Energetic Insurance can reduce credit barriers, support cost-effective renewable energy procurement, and help support the greening of supply chains and reduction of scope 3 emissions? Contact us here.
This article does not constitute and is not intended by Energetic Insurance to constitute financial advice or a solicitation for any insurance business.