Why is the residual supply mix so important?
Background
More and more, businesses are being asked to measure, report and reduce their emissions. In some cases, businesses can achieve these reductions themselves - by planning fewer plane trips, doing more video-conferences, etc. For other things, such as the electricity and gas they purchase to run their operations, it’s much harder. Ask a company to reduce emissions from their electricity use, and - once they have reduced their usage and taken steps to increase their efficiency - they generally need to talk to their supplier about their electricity procurement.
This is because generation of electricity is almost never ‘controlled’ by the company that consumes it - they generally can't choose how it is generated. Rather, a consumer will sign a sales agreement, and the generator will ensure that enough electricity is produced and ‘injected’ into the national grid to make sure that the consumer can get power when it needs it.
For consumers that want to reduce the reportable emissions from their electricity use, they must ensure that they are sourcing electricity from renewable electricity generators, in a way that supports the development of more renewable electricity generation. This approach to achieving emissions reductions and system impact via procurement is becoming more and more popular amongst electricity consumers. This is what we at Certified Energy refer to as ‘impactful renewable energy procurement’.
This is all fine, so far. Systems such as the NZECS, and emerging mechanisms such as peer-to-peer trading and corporate power purchase agreements all exist to help corporate electricity consumers procure electricity intentionally and impactfully. Generally, they do so credibly, and in line with international best practice.
The challenge is how to keep a track of things, when dozens, or even hundreds, of corporate electricity consumers are all trying to claim reduced emissions by way of renewable electricity purchase.
How does it work?
When an electricity consumer is trying to work out their emissions baseline, they use an emissions factor - an estimate of the emissions caused by electricity generation. They apply this factor to each unit of electricity consumed, and sum it up to see the emissions of their electricity usage. In rough terms, the bigger the number, the more likely they are to take action.
Historically, we have used what is called a National Supply Mix (NSM) to derive emissions factors for electricity use. This is the sum of emissions from all electricity generation in New Zealand. In 2022/23, this number was 67.5kg of carbon dioxide equivalent emissions for every megawatt hour of electricity generated - highly renewable due to the unusually heavy rainfall experienced across the country during the year.
The problem is that this number includes ALL generation, and so by definition includes the generation that every other well-meaning electricity consumer has explicitly procured - regardless of which mechanism they used to procure it. So, if one company has signed a PPA with a solar farm, and another company is action based on the NSM, it’s very likely that they are both claiming usage of the same renewable electricity.
This is the definition of double-counting, a phenomenon whereby often well-meaning parties overstate their actions or understate their impact, by simultaneously claiming ownership of the same benefit. By allowing double-counting, and by not removing explicitly procured volumes from these emissions factors, we are underestimating the amount of work that the rest of the country has to do, and decreasing the incentive for them to do it.
If we require a business to pay extra to purchase renewable electricity in a way that supports decarbonisation, we need to make sure that this purchase is only claimable by them. Tracking these purchases explicitly ensures they can claim the benefit of their actions. Equally importantly, it ensures that others are incentivised to take action, as their emissions will not reduce without their own direct action.
How does the Residual Supply Mix come into play?
When parties buy renewable electricity, we can track this purchase on the NZECS, enabling title to be verifiably transferred to a consumer. These tracked purchases can be removed from the NSM. This leaves only the ‘residual’ electricity, inevitably a less appealing mix of generation. This is what is referred to internationally as a Residual Supply Mix, or RSM. While the NSM represents all electricity generation in the country, the RSM represents the generation that has not been explicitly contracted, and is therefore the mix that is supplying the remainder of the country.
Using the RSM as the basis for setting emissions baselines will maximise the impact of voluntary market activity. Using a NSM as the basis for setting emissions baselines decreases the decarbonisation effect of proactive impactful electricity procurement, and leads to double-counting of premium electricity.
It’s worth noting that most corporate reporting standards are now recommending that businesses report upon both the NSM and the RSM, to track what is happening at a country level, and also the effects of their own actions.
Importantly, use of the RSM has a ratchet effect. The more that electricity consumers perform impactful electricity procurement and track these purchases on the NZECS, the more carbon-intensive the residual supply mix becomes. This creates an increasingly compelling incentive for others to take action.
Certified electricity has tracked electricity purchases on the NZECS since 2019, and has published an RSM every year since for use by the New Zealand electricity market, free of charge. This factor has continued to deviate from the underlying NSM, as more and more electricity consumers perform and track their renewable electricity purchases. In 2022/23 the gap was more than 3%, almost twice as wide as the year before.
What should we do?
To ensure that renewable electricity purchases are maximally impactful, and to ensure that we create an optimal environment for others to take action, it is important to use the RSM as the basis for setting your emissions baselines, and to track your electricity procurement activities on the NZECS.
Want to learn more about the NZECS or discuss use of the RSM? Email contact@nzecs.co.nz to arrange a time.
1. The NZECS is the New Zealand Energy Certificate System, operated by Certified Energy.