Analysis: mandatory hourly matching’s high costs would likely kill so much clean energy procurement, it would increase total long-run emissions.

As the GHGP undertakes revisions to its Scope 2 guidance to evolve beyond the current status quo of annual matching, hourly matching with tighter market boundaries (aka 24/7 CFE) is a prominent contender.

Studies suggest that if a company's hourly matching percentage is high enough and the clean energy is fully deliverable — both big assumptions — hourly matching could avoid more emissions than current annual matching. But... and it's a big but... hourly matching is SIGNIFICANTLY more expensive.

That added cost could have a large negative influence on the voluntary corporate clean energy procurement market. The core economic principle that underpins this concern is “demand elasticity”: that when something becomes more expensive, companies will do less of it. And in this case, the “it” is voluntary clean energy procurement.

If the GHGP mandates hourly matching, it might increase the beneficial impact of each company that continues to buy renewables following GHGP guidance, but it would also reduce the number of companies who do so. So, we investigated the net result of those two opposing forces. In this analysis, we take a closer look at the numbers, using both third-party, peer-reviewed studies (such as He, et al. and Riepin and Brown) and WattTime data.

Our analysis finds that, based on best available data, it is very likely that the GHGP mandating hourly matching would increase emissions compared to the status quo, not reduce them.

Modeling four procurement scenarios

To study this question, we developed a method of simulating procured renewable energy portfolios using cost [1,2] and load [3] assumptions provided by the National Renewable Energy Laboratory (NREL). The simulation solely considers costs of the total estimated levelized cost of energy and transmission for projects and does not include any revenue or costs from grid electricity markets. 

We simulate portfolios for each grid region in the US in the year of 2030, and then estimate the avoided emissions from each strategy using the Long Run Marginal Emissions Rate (LRMER) provided by Cambium. The strategies we considered fall into four categories:

• Local-only Hourly Matching: The main hourly matching proposal. Load is matched 100% on an hourly basis, resulting in >100% matching on an annual basis, plus requiring that generation is from the same grid region as the load.
• Non-local Annual Matching: The current status quo in carbon accounting. Load is matched 100% on an annual basis with least-cost projects ($/MWh), without a requirement that generation is from within the same grid region as the load.
• Emissions-focused Annual Matching: A common alternative proposal, often called a “consequential” approach. Load is matched on an annual basis in any region, but rather than optimizing for cost per MWh of clean energy ($/MWh), it focuses on least cost per avoided emissions ($/avoided kg CO2e) of that clean energy.
• Local-only Annual Matching: To isolate the impact of a local deliverability requirement, we also considered an option whereby load is matched 100% on an annual basis with least-cost projects ($/MWh), with a requirement that generation is from within the same grid region as the load.

Hourly matching is ~600% more expensive than the status quo

Compared to the current guideline of non-local annual matching, annual matching with a local procurement constraint was only ~60% more expensive on average (range: 20% to 120%). Emissions-focused annual matching was at cost parity with non-local annual matching (range: -40% to +20%). By sharp contrast, hourly matching was an average 600% more expensive (with a range of 200% to 1,200% across others’ studies and WattTime analysis).

Each of these studies — He, et al., Riepin and Brown, and WattTime — looked at a different set of locations and times, so cost variations are expected. However, each of these studies found a very significant cost premium for achieving 100% hourly matching, as well as large differences in the cost to achieve each kg of avoided carbon emissions. Below we show our estimates alongside others in the literature.

Understanding how cost might affect participation 

But how might these higher costs for hourly matching affect corporate participation and total emissions impact?

To answer that question, we need three things. 

First, we need to know the level of demand at the current status quo cost. How many companies currently have net-zero emissions targets under current Scope 2 rules? How much C&I electricity load do they represent? How much clean energy does that imply? 

Many studies include a scenario in which 10% of commercial and industrial load participates in net-zero claims. Our best estimate is that this is reasonably close to the actual status quo in real life (under the current system of non-local annual matching) because in 2024, total contracted energy in the US by corporations was 74.6 GW [4], which most closely matches the size of the non-local annual portfolio.

But how would companies respond to a change in cost for implementing their net-zero emissions and/or 100% clean energy strategy? This relationship between participation and price can be estimated the same way models estimate how much renewable energy grid will build: using supply and demand curves. 

So second, we need a supply curve. This curve represents how much it would cost for any given amount of companies (measured in their associated megawatts) to achieve net zero under the GHGP depending on what the rules are. We can calculate that based on the existing literature and the cost simulations above.

Lastly, we need a demand curve: a way to estimate what levels of participation to expect at different levels of cost. The shape of a demand curve is usually measured by its price elasticity of demand. And the price elasticity for corporate net-zero claims is not known. But, it can be instructive to ask what would happen if it is anywhere close to typical values that have been measured in similar markets, to get a sense of the scale. We found several examples in the literature: 

• A study published in Energy Policy of demand for Renewable Energy Credits (RECs) in Australia found a price elasticity of 0.96.
• An Ecosystem Marketplace analysis of voluntary carbon markets shows that in recent years as voluntary carbon markets increased prices by 82%, primarily driven by more stringent requirements, demand dropped by 51%, which is equivalent to a price elasticity of demand of 0.62.
• A July 2024 E3 study of voluntary clean energy procurement included an average demand elasticity of 0.5.

So while the actual price elasticity of demand for net zero claims under the GHGP is not known, the best estimates we have show a range including 0.96, 0.62, and 0.5.

Hourly matching’s high cost would push some corporates out of the voluntary clean energy procurement market, increasing emissions by an estimated 42.6 million tonnes annually

The big-picture takeaway is alarmingly clear. At a range of potential cost premiums to achieve hourly matching and across a range of demand elasticities, GHGP mandating hourly matching would effectively kill voluntary corporate clean energy procurement. The median estimate is that it would increase grid emissions by 42.6 MT CO2e per year, compared to existing GHGP standards of non-local annual matching.

By contrast, emissions-focused annual matching avoids more emissions than non-local annual matching at all values of demand elasticity, because while it has a slightly higher price than non-local annual matching, it also has a higher avoided emissions rate that compensates for the potential decrease in participation. 

Weighing the risk: could high costs undermine net-zero progress?

Of course, we can’t predict exactly what would happen if costs skyrocket. Supply and demand curves represent an idealized version of economics with many simplifying assumptions. Perhaps the demand elasticity of companies to make net zero claims under the GHGP is far lower than clues from previous studies suggest. Or perhaps companies might abandon their net zero claims, but still try to achieve fairly low emissions. Maybe.

But this is a big risk to take. Across several studies, the price premium for achieving 100% hourly matching has been shown to be at least 200% higher than the current standards. For that to fail to significantly reduce participation would require a massive, almost-unheard-of decrease in price elasticity. 

Further, this risk is not hypothetical. Like our analysis, E3’s 2024 study cautioned that “increases in [energy attribute certificate] EAC prices may reduce the voluntary demand for clean energy generation.” Their analysis estimated that a 4x increase in EAC prices could lead to an increase as much as 102 million tonnes per year. More recently, a survey of clean energy buyers by Green Strategies has found that “nearly 80% of respondents lack confidence that they would be able to procure time-matched clean electricity within smaller market boundaries. Respondent insights indicated concern over higher costs and whether suppliers will be able to provide resources that meet time and location criteria.”

And last week, another survey by the Clean Energy Buyers Associate found that 75% of their members are opposed to mandatory hourly matching, stating that it is “very difficult to implement”.

The rising costs of renewable energy and the changing political climate have created an environment where keeping net-zero commitments is a much more challenging goal to justify than it used to be. Raising the costs still further could make it very challenging to justify continuation of this goal to executives outside the sustainability team.

Again, this study is not conclusive. But the preponderance of evidence suggests that the massive price disparity between 100% hourly matching raises a very strong risk that the GHGP mandating hourly matching would on net cause enough price-sensitive companies to cease participating than it would on net increase emissions, not decrease them. Meanwhile, emissions-focused procurement and other carbon matching strategies would not increase costs while reducing emissions.

Future research into the effects of mandatory requirements of voluntary programs should consider effects on voluntary program participation and how that impacts total emissions. But in the meantime, the GHGP should strongly consider that what evidence does exist suggests they are currently trending toward a policy change that will increase emissions, not decrease them. 

image source: Pexels | Tom Fisk