Power Purchase Agreements - the answer to net-zero?

27th of November 2023
Power Purchase Agreements - the answer to net-zero?

Many companies are turning to Power Purchase Agreements (PPA) as a way of effectively managing, and guaranteeing reduction of, their Scope 2 greenhouse gases (GHGs). Oriol Margo, Kimberly-Clark’s sustainability transformation leader for Europe, the Middle East and Africa, tells us more.

The science is clear: in a world grappling with climate change, we must aim for net-zero if we are to have any chance of staying within the agreed limit of average global temperatures rising no more than 1.5 degrees Celsius. That means balancing the amount of greenhouse gases (GHG) emitted into the atmosphere with an equivalent amount removed or offset, resulting in no net increase in emissions.

Businesses across all sectors know they must act. Yes, there is an ethical obligation for companies to use their influence and power to reduce their impact on global warming. But achieving net-zero has become a strategic necessity that has the power to foster innovation as firms re-evaluate their operations, invest in clean technologies, and adopt sustainable practices. This drive for innovation not only reduces GHG emissions, but also enhances efficiency, reduces costs, and stimulates economic growth.

Regulatory pressure is mounting, and many governments around the world are implementing stricter environmental regulations and carbon pricing mechanisms. Businesses that proactively go net-zero are better positioned to adapt to the changing legislative landscape, avoiding financial penalties and the associated reputational damage.

Despite the number of companies that have set a net-zero target continuing to increase, there are real concerns most goals to reach net-zero are not supported by plans or strategies to meet them.
The GHG emissions associated with bringing products and services to market – regardless of sector – can be linked to three ‘buckets’ of activity. First, there’s the pollution created when making things in factories and facilities, or the exhaust fumes of trucks and vans being run by a company, known as Scope 1 emissions.

Then there is the impact of the electricity and power a company buys to power its operations (Scope 2).

Then there’s everything else: the GHGs created by the suppliers that produce the various components that make up a product and the carbon impact of consumers using and disposing of products at the end of the chain. For most companies, so-called Scope 3 emissions account for more than 70 per cent of their footprint.

Scope 2 challenges

Having addressed the GHGs it can directly control, within its Scope 1 emissions, companies quickly set about tackling Scope 2 – the indirect GHGs connected to the production of purchased electricity. But there are challenges. The biggest issue lies in the fact businesses often have limited control over the energy sources used by their electricity providers.

Transitioning to cleaner energy can be difficult, especially in countries where renewable energy options are limited, and the grid relies heavily on fossil fuels. In some regions, there may be a lack of government incentives or supportive policies to encourage businesses to transition to cleaner energy sources. Without financial incentives, the business case for reducing Scope 2 emissions is not very compelling.

Many companies are turning to Power Purchase Agreements (PPA) as a way of effectively managing, and guaranteeing reduction of, their Scope 2 GHGs.

What are PPAs?

PPAs are contractual agreements between electricity buyers and sellers, typically used in the renewable energy sector. In a PPA, companies agree to buy a specified amount of electricity from a renewable energy project, such as a wind farm or solar installation, at an agreed-upon price and over a defined period. This might be several years, or even decades.

PPAs work because companies get to purchase a consistent and predictable amount of clean energy that is aligned to their sustainability goals. And the energy sector gets a guaranteed sale over a set period of time. Plus, by locking in a fixed price for the clean electricity, companies are able to hedge against future energy price fluctuations, providing budget certainty and potentially reducing overall energy costs.

PPAs are growing in popularity all around the world. The global PPA market, which is currently valued at US$20.1 billion, is set to grow by almost 40 per cent a year between now and 2031. In the pursuit of a net-zero future and the critical task of reducing greenhouse gas emissions, PPAs are emerging as a beacon of hope. Scope 2 emissions often escape a company’s direct control, making the transition to cleaner energy fraught with challenges. The growing popularity of PPAs signifies their potential to drive change.

 

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