Measuring impact in renewable energy assets

April 19, 2022

Renewable Energy, a global priority

Over the past two years, renewable energy has jumped at the forefront of global priorities. The COVID-19 pandemic has prompted governments to act by focusing on a “green recovery”. Sadly, the war in Ukraine has further underscored the fragility of energy security and its dependence on fossil-fuels. The European Union’s REPowerEU plan announced in March is evidence of the urgency to accelerate the adoption of renewable sources. Renewable energy is indeed at the core of energy policies and a net-zero economy.

Why should investors measure impact in renewable energy?

As investors begin to align their strategies with sustainability disclosure legislation and Paris agreement commitments, the focus will shift towards implementing net-zero portfolios. The ability to identify, measure and monitor the tangible contribution of investments towards a low carbon future is among the most challenging tasks that investors will face, even when investing in renewable energy assets.

What impact should investors measure in renewable energy investments?

Before embarking on how to quantify the contribution of renewable energy investments, investors need to first identify the relevant impact measures. Investors can focus on three impact calculations: the amount of MW of capacity installed, MW of energy produced, and the tons of CO2e avoided. It is important to mention that renewable energy assets also contribute to additional impact, such as job-creation and air pollution reduction.

In the case of MW of capacity installed, it is pertinent to private debt and equity investments of new developments or expansions given the newly installed carbon-free generation. Regarding the amount of MW of energy produced, this is most relevant for operational assets. These two metrics are key to assess the growth and penetration of renewables. Also, these metrics are readily available from sponsors, technical reports and due-diligence documentation. During the lifetime of the asset, investors can engage through ownership, covenants and contractual terms to request these measures on a recurring basis.

Understanding carbon-avoidance in renewable energy investments

However, to measure the net-zero contribution, investors need to assess the amount of CO2e avoided. That is, the amount of avoided emissions compared to a scenario in which there is no energy transition or a reference scenario; which provides the trajectory of carbon reduction to be followed.

In the case of the European Union’s energy sector, a threshold of 100gr of CO2/kWh has been set for power generating assets that are considered aligned with a net-zero future by 2050. This compares to 265 GHG emission intensity (gCO2/kWh) of the EU’s overall electricity generation for 2020 which shall gradually decrease to reach 110 figure by 2030. Recent data shows a significant increase in renewable electricity supply which was an all-time high, exceeding 8 000 TWh in 2021, a record 500 TWh above the level in 2020. Output from wind and solar PV increased by 270 TWh and 170 TWh, respectively, while hydro generation declined by 15 TWh due to the impacts of drought, notably in the United States and Brazil . This increase causes a further drop in the GHG emission intensity of electricity generation and thus confirms the downward trend of the curve. As renewable energy emits zero carbon dioxide, a portfolio of renewable energy assets could avoid on average 203gr of CO2e/kWh between 2023 and 2030, based on the EU’s reference scenario of 20202. As a result, the larger the investment portfolio of renewable assets, in terms of MW installed and energy produced, the larger the amount of avoided carbon emissions and contribution towards net-zero.

However, this does not reflect the full picture. Renewable assets generate indirect emissions, such as those emitted during manufacturing and operations. Accounting for these emissions is known as Life Cycle Analysis and estimates vary depending on assumptions. For off-shore wind farms, the high-end of estimates is 23gr of CO2/kWh and for solar photovoltaic 83gr of CO2/kWh, according to the latest study of the United Nations Economic Commission3. In any case, well-below the EU’s threshold necessary to transition towards a carbon-free economy.
Ultimately, a representative impact assessment requires investors to pro-rata their investment by the total financing, to avoid double counting of the positive impact of the investment.

Renewable energy investing: Measurable positive impact and performance

To conclude, investors seeking net-zero strategies should take the opportunity to add renewable energy investments through private debt or equity. As these strategies not only offer benefits in a strategic asset allocation, such as diversification, inflation protection and income, but directly contribute to a measurable impact towards a net-zero economy.

Sources:
1 EU Reference Scenario 2020 (europa.eu)EUTaxonomy_100g_7points.pdf (ecostandard.org)
2 LCA-2.pdf (unece.org)
Other Sources
The European Union sustainable finance taxonomy | Developing Sustainable Finance Definitions and Taxonomies | OECD iLibrary (oecd-ilibrary.org)
TEG final report on the EU taxonomy (europa.eu)
Technical annex to the TEG final report on the EU taxonomy (europa.eu)
Greenhouse gas emission intensity of electricity generation in Europe — European Environment Agency (europa.eu)
Renewable Energy Sources and Climate Change Mitigation — IPCC
2 Cover Sheet + Book TOC.indd (ipcc.ch)
EUTaxonomy_100g_7points.pdf (ecostandard.org)
The European Union sustainable finance taxonomy | Developing Sustainable Finance Definitions and Taxonomies | OECD iLibrary (oecd-ilibrary.org)
TEG final report on the EU taxonomy (europa.eu)
Technical annex to the TEG final report on the EU taxonomy (europa.eu)
Greenhouse gas emission intensity of electricity generation in Europe — European Environment Agency (europa.eu)
Renewable Energy Sources and Climate Change Mitigation — IPCC
2 Cover Sheet + Book TOC.indd (ipcc.ch)

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