Grey Power Markets - The current way is mostly grey!

„Grey“ power markets are characterized by utilities running fossil fuel power plants.

High electricity prices in “grey” power markets due to high levelized costs of electricity and additional costs for purchasing Emission Allowance Certificates.

Offtakers face two major problems in consuming “grey” electricity:

  1. Higher costs of electricity consumption compared to the procurement of 100% renewable energy.
  2. Offtakers face intransparency to track the specific source of consumed electricity hampering the realization of offtakers’ sustainability strategy and climate targets.

Before evaluating the various options of procuring green electricity to become a renewable champion, it is important to keep in mind how electricity consumption could be emission-free. Therefore, it makes sense to start from the status quo of how offtakers are currently consuming electricity:

 

Supply Chain of Electricity Markets

Sustainability in general and emission-free electricity consumption in particular matters for an increasing number of companies and public institutions. However, the vast majority of offtakers are still using standard electricity contracts. The standard offtake scenario consists of a short-term Power Purchase Agreement (PPA) with a one to three years tenor between an offtaker and a municipal utility. The graph shows the interaction of related parties under those standard utility PPAs.

 

Standard Power Purchase Agreements for Delivery of “Grey” Electricity Source: Think RE GmbH, © Think RE GmbH

 

The physically delivered electricity under those PPAs is a mixture of electricity generated from various technologies like fossil fuels, nuclear, and renewables. By bundling different technologies in one portfolio of electricity generation at the upstream market, it is impossible to separate renewable electricity from other energies in the mid- and downstream market. The resulting technology-mixed electricity is finally distributed to the offtaker who is unable to assign the MWh consumed to a particular power plant. In addition, the electricity price for a “grey” electricity product might be higher than a 100% green product since the net cost for generating electricity excluding grid fees and levies (so-called Levelized Cost of Energy or LCOE) are lowest for renewable energy plants. In sum, the current European power markets remain on a high level for corporate clients as shown in the graph.

 

Level of Industrial Electricity Prices

 

Electricity Price in EUR / MWh for Industrial Clients in Europe (without State Aid) The Continental European Average includes the following countries: Austria, Belgium, Czech Republic, Denmark, Finland, France Germany, Italy, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, United Kingdom. Prices shown in the graph refer to companies consuming between 2 GWh to 20 GWh excluding value added tax and recoverable taxes. Source: European Commission

The graph shows the high average electricity price for corporates and also the high heterogeneity of these prices across countries. Sweden is one of the cheapest electricity markets with 67 EUR/MWh as of 2018 for corporate with medium electricity consumption.

In contrast, Germany is more than twice as expensive with 148 EUR/MWh for the same year. This is more driven by additional fees and taxes rather than being induced by high LCOEs as already being mentioned as net costs without grid fees etc. In energy-intensive industries, invoiced electricity prices are lower compared to sectors with lower electricity consumption due to governmental support.

Utilities which are generating their electricity from fossil fuels needs to buy Emission Allowance Certificates (EACs) in order to operate fossil fuel power plants. Those EACs allow for emitting a certain amount of Greenhouse Gases and are traded on secondary markets.

However, the utilities or energy traders are allocating those costs to the end-consuming corporates which are facing higher electricity costs accordingly.

 

Complexity and Structure of Industrial Electricity Prices

 

Electricity Price Components in EUR / MWh as of 2018 Source: Fraunhofer ISI

In order to support the international competitiveness of European companies, energy-intensive companies get a state aid on their invoiced electricity costs based on Article 10a(6), Directive 2003/87/EC of 13/10/2003, as of 25/06/2009 (EC Emissions Trading Directive) leading to lower electricity prices invoiced to electricity-intensive sectors.

This is one major factor why prices in “grey” electricity markets not only differ across countries but also across industry sectors.

The graph shows the discrepancy between medium and larger corporate electricity consumers.

To summarise, corporates and public end-consumers are mainly facing two major issues in the current grey electricity markets:

 

  1. High energy prices: Depending on the amount of their electricity consumption, commercial offtakers like corporates or public institutions pay high electricity prices, especially if they do not fall under the described state which is the case for most of the companies. In fact, the high costs are mainly induced by grid fees and levies as shown for Germany. However, the Net electricity price can be reduced with green energy solutions since e.g. the costs for the Emission Allowance Certificates would disappear for the producer resulting in lower electricity costs for the offtaker accordingly. Additionally, LCOE‘s of conventional power plants will rise due to rising carbon dioxide prices that are regulated by laws (e.g. Minimum Price) Lack of independency to achieve their sustainability targets: Offtakers do not have the opportunity to directly influence their climate strategy and are, therefore, still contributing to Greenhouse Gas Emissions. Consequently, they are limited in achieving their climate targets and the sustainability strategy in terms of their electricity consumption. In “grey” electricity markets, the offtaker’s sustainability progress depends completely on the investment strategy and the liquidity of the utility sector. The following map shows the greenhouse gas emissions in selected grids. The majority of the emissions occurs in emerging markets or developing countries whereas the utility sector is state-owned and often suffers from a smaller liquidity amount available for renewable energy investments

  2. Lack of independency to achieve their sustainability targets: Offtakers do not have the opportunity to directly influence their climate strategy and are, therefore, still contributing to Greenhouse Gas Emissions. Consequently, they are limited in achieving their climate targets and the sustainability strategy in terms of their electricity consumption. In “grey” electricity markets, the offtaker’s sustainability progress depends completely on the investment strategy and the liquidity of the utility sector. The following map shows the greenhouse gas emissions in selected grids. The majority of the emissions occurs in emerging markets or developing countries whereas the utility sector is state-owned and often suffers from a smaller liquidity amount available for renewable energy investments.

 

Greenhouse Gas Emissions

Grid Emission Factor by Country   Source: Think RE GmbH, © Think RE GmbH

The Greenhouse Gas Protocol differentiates between three types of emissions which affect the global footprint of a corporate or a public institution.

Scope 1 emissions are emissions caused directly by the own business activities. For example, carbon dioxide is blown through the factory’s chimney because of manufacturing activities.

In the electricity sector, this is caused by utilities running fossil fuel power plants. Utilities must participate in markets for Emission Allowance Certificates which have to be purchased for allowing the utility to issue a certain amount of carbon dioxide.

As already discussed, Scope 1 emissions in the electricity generating sector normally result in higher electricity prices invoiced to offtakers.

 

Types of Greenhouse Gas Emissions   Source: Think RE GmbH, © Think RE GmbH

 

Scope 2 emissions are indirect emissions caused by the consumption of purchased electricity. Assuming a “grey” electricity market, the offtaker increases the Scope 2 emissions by increasing its consumption of purchased electricity since the utility, which produces and delivers the electricity, has to increase its electricity output provided by fossil fuel plants. The offtaker can reduce these emissions by procuring green energy through standardized green products like e.g. Corporate Power Purchase Agreements (PPA or CPPA).

Finally, a Scope 3 emission covers the greenhouse gas issuance caused by stakeholders within an offtaker’s value chain. That means emissions can occur in the upstream as well as at the downstream part of the value chain. Upstream Scope 3 emissions occur if a supplier has high Scope 1 or Scope 2 emissions. Therefore, these emissions may be increased by companies outsourcing certain manufacturing stages. A downstream example could be the case if the offtaker’s client has high Scope 1 and Scope 2 emissions caused by processing goods or services delivered by the offtaker. In addition to this, Scope 3 emissions can also be caused by a corporate or public institution itself by e.g. business travels via airplanes. For measuring the emissions in the best possible way and make them globally comparable, there are two calculation methods, the market-based and the location-based approach.

Think RE has specialized in managing measures for reducing Scope 2 and Scope 3 emissions which are the major emission category from an offtaker’s point of view.