Energy is at the heart of the climate challenge and plays a crucial role in a just transition. According to WRI, energy consumption is the largest source of human-caused greenhouse gas emissions, with fossil fuels accounting for 92% of CO2 emissions. While energy is the leading driver of emissions, it is also an essential piece of the puzzle in strategies for combating climate change. Transitioning away from fossil fuels and driving uptake of renewable energy is essential.
Renewable energy is energy from sources that are cyclic and naturally replenished on a human time scale. The most common renewable energy sources are: solar, wind, hydro, geothermal, and biomass.
Renewable power generation costs have fallen dramatically over the past decade driven by technological innovation, economies of scale, and competitive supply chains. Declining costs have driven adoption of renewable technologies in upper and middle income countries, where diverse sources of financing are readily available.
In the early 2010s, when renewable energy sources were cost prohibitive, revenue from carbon credits aided the development of renewable energy projects in countries like China, India, Brazil, and Turkey. Renewable energy sources (RES) carbon credits generated large issuances and have historically made up a significant portion of available credits in voluntary carbon markets (VCMs).
Declining costs associated with grid-connected renewable projects, and increasing financial attractiveness, means these projects are unlikely to meet additionality criteria. Meaning that these renewable energy projects would have been created even in the absence of revenues from carbon credits. In the light of the increasing financial attractiveness of renewables, and questionable additionality, the two largest certifiers of carbon projects, Verra and Gold Standard, are no longer permitting grid-connected renewable energy projects in most countries, except for those defined as a “Least Developed Country” by the World Bank.
As Verra and Gold Standard have closed the doors for many renewable energy projects, developers are seeking alternative financing instruments. There are two major trends that have emerged in the renewable energy space
- a new registry called the Global Carbon Council (GCC) has emerged as a new house for projects that Verra and Gold Standard will not accept, and
- the growth of the Renewable Energy Certificates (RECs) market
RES carbon credits vs renewable energy certificates (RECs)
As alternative financing instruments incentivizing the development of renewable energy capacity, RES carbon credits and RECs play an important role in the energy transition and co-exist in the renewables landscape. Some renewables projects on the market that have revenue streams from both the sale of carbon credits and RECs, and both can help companies achieve their net zero goals. However, RES carbon credits and RECs have material differences buyers need to be aware of when making claims about renewables usage in their value chain and their offset strategy.
RES carbon credits
RES projects are a type of avoidance carbon credit measured in metric tons of carbon dioxide (tCO2). These emissions reductions credits are based on displacing greenhouse gas emissions from fossil fuel power plants with renewable electricity beyond a grid baseline. High quality RES projects drive the development of new renewable energy capacity of a grid, resulting in a net reduction of carbon emissions. Carbon credits are a transferable instrument that can be traded or retired by a company to offset scope 1, scope 2, and scope 3 emissions.
Renewable Energy Certificates (RECs)
RECs are an accounting instrument that certify the production of a megawatt hour (MWh) of electricity from renewable energy sources. It is a type of Energy Attribute Certificate (EAC). RECs can be purchased through exchanges or bilateral trades. When the electricity is consumed, the associated REC needs to be canceled on the registry. RECs cannot be used to offset emissions, but can be used to reduce a company’s carbon emissions, specifically scope 2 emissions. Much like in VCMs, there are a variety of entities providing technical guidance and setting best practices for how companies can make climate claims. Corporate renewable energy buyers certified by RE100 or who follow CDP requirements must factor in the geographic market boundaries and vintage limitations. For example, a German manufacturer cannot purchase RECs from India with a 2010 vintage to reduce their 2022 scope 2 emissions.
How Sylvera evaluates RES credit quality
We believe that high quality carbon credit ratings are necessary to ensure the world's net zero claims are real. Independent ratings are an important way to analyze and mitigate risk for business and investment decisions. Our due diligence process examines a project’s emission reduction or removal claims from the ground up using independent data sources.
Top-down analysis would be quicker and simpler to deliver, however we firmly believe in the superior nature of our bottom-up approach. Our RES ratings synthesize data from a variety of sources including: project documentation, grid generation data, government reports, third-party power generation reports, and geospatial data. These data inform our sub-indicators that roll up into our Sylvera rating and core scoring pillars.
Our rating is derived from a combination of carbon, additionality and permanence scores. These three core pillars are combined in a series of matrices to ensure that underperformance in one area does not get overshadowed by high performance in others.
Our carbon score models a project’s carbon performance from the ground up to verify whether a project is accurately reporting on emissions reductions achieved by the activity. If multiple vintages have been permitted, the carbon score is a vintage-weighted average score. Our models utilize power generation data from an offtaker and/or publicly available grid generation data to assess if a project is accurately reporting power generation.
Accurate carbon accounting underpins a project’s issuance. If there is material over-reporting of emissions reductions, it will undermine the validity of credits issued. For example, if third-party grid data shows that a renewables project produced less power than it reported, we think this is vital due diligence information to provide to our customers on the risk of buying those credits.
Additionality assesses the likelihood that carbon revenue enabled the implementation of project activities that avoided emissions. If the carbon avoidance claimed by a project would have occurred without revenue from the sale of carbon credits, then they are not additional. We also assess over-crediting risk, or the extent to which a project’s issuance volume is justified, by taking into account the baseline emission factor used by the project, as well as other potential emissions sources not reported and accounted for by the project.
Permanence measures the risk that the carbon stock of the project will not remain intact for an atmospherically significant time period. However, there is no carbon stored by RES projects, only emissions avoided. These projects are given a permanence score of 5 out of 5 because there is no risk of reversal. Similarly, registries do not require RES projects to allocate a portion of credits to a buffer pool.
We assess the impact of project activities on biodiversity and community impact through the lens of the United Nations Sustainable Development Goals (UN SDGs). However, the co-benefits score is not included in the overall Sylvera Rating as they do not influence the carbon impact of a project.
What sets Sylvera's RES framework apart?
Existing data and assessments for RES credits are sparse, highly qualitative, and rely on poor proxies to measure carbon credit integrity criteria. Our RES framework goes beyond existing methodologies in three key ways to provide buyers with independent, reliable and quantitatively driven assessments.
- To build our carbon score, we model the constituent elements of a project’s carbon accounting from the bottom-up by using project reported emissions and third-party grid data. Current carbon credit assessments do not provide an overlay of data to verify that the net emissions reductions claimed by a project have truly materialized. The Sylvera approach to the carbon score enables buyers to identify projects that may have been over or under reporting power produced.
- Our strength of baseline assessment rebuilds the baseline from the bottom-up to give a robust view of the potential over-crediting risk of the project. Some currently available assessments of RES credits rely on comparing one project’s baseline against all the other offset projects’ baselines. This is a problematic approach; if we take the example of a renewables project, all have the same incentive to inflate the grid emissions factor. Relying on such a proxy does not go in-depth enough to sufficiently highlight the potential for over-crediting risk.
- Financial additionality in RES projects is essential. We created our own proprietary economic model to scrutinize the reported economics. It would be easy to do a simple revenue analysis for financial additionality. In isolation, this says very little about the economic decision-making process at the heart of the additionality question. We believe you have to rebuild the project economics from the ground up. We replicate the internal rate of return within a full financial model to give a robust due diligence rating.
Sylvera has developed a reputation as nature-based solutions specialists, thanks to our world-class geospatial, earth observation, and machine learning experts. However, our mission to provide clarity in the VCMs doesn't stop at agriculture, forestry, and other land use (AFOLU) carbon credits. We have built an experienced team with project finance, natural resource economics, and commodities expertise to develop our non-AFOLU frameworks. Our RES framework and ratings provide robust and repeatable assessments of credit quality to enable buyers to mitigate risks and transact with confidence.
When it comes to RES credit due diligence, bottom-up is the only way to go. Download our RES Framework White Paper here.