March 16, 2022

As Duke and Dominion ramp up their net zero goals, the supply chain comes into view

As utilities and power providers ramp up their net zero emission goals in response to public pressure and climate change concerns, two of the nation's largest utilities last month took an unexpected step to extend those commitments up and down the supply chain. 

Duke Energy and Dominion Energy both announced that they would expand their existing net zero emissions goals to include Scope 2 emissions – or those related to electricity the companies use but don't generate – and certain Scope 3 emissions related to downstream customer and upstream supplier energy use. Only a handful of other utilities have even included Scope 2 emissions in their climate commitments and no major ones had tackled Scope 3. Even the trade association for investor-owned utilities, the Edison Electric Institute, has cautioned that Scope 3 emissions are difficult to measure and even harder to reduce. 

Supply chain emissions are a "messy problem," said Mark Griffith, IHS Markit senior research director for North American power and renewables, but it's one that companies are facing more pressure to tackle amid pressure to meet environmental, social and governance (ESG) commitments. 

"The public wants to know, the investors want to know" a company's environmental impact, said Griffith. "You'll continue to see attempts at complying and being transparent. They want to see the exposure of the carbon impacts and the stress-testing of investor-owned utilities."

Duke said its work to clean up supply chains will begin with identifying emissions, and that more reporting and "actionable steps" will be released in October.

"We share the view of many of our stakeholders that we can take a leadership role in tackling these changes," Duke spokeswoman Shawna Berger said. "We believe trust starts with transparency and we aim to provide our stakeholders with insight into our practices."

Danielle Vitoff, director of decarbonization solutions for consulting firm Guidehouse, said that details are still emerging on how power providers will confront, or even consistently measure, emissions that extend up the supply chain or down to the customer level. Cutting Scope 3 emissions on the customer end, she said, requires a "much more holistic view of energy system decarbonization as a whole," not just replacing fossil fuel generation with renewables.

"When you start to look at what a utility has ownership of, it becomes a much more complex story and one that's a lot more challenging," Vitoff said. "A utility knows how much energy is produced or how much gas is flowing. Once you get up the supply chain, especially if you don't own the generating station, or down to the customer level, that's where it becomes much more challenging."

Daniel Tait, research and communication manager for the Energy and Policy Institute, which tracks emissions reduction goals from the power sector, said he's encouraged to see the broadened commitments, but added that transparency and oversight will be essential to keeping the companies accountable. 

"Because of the uniqueness of the utility industry and its importance to everyday Americans, that makes it essential for us to track," Tait said. "If we don't have a good sense of their emissions, how are we ever going to be able to account for full decarbonization?"

What does Scope 3 even mean?

The Greenhouse Gas (GHG) Protocol, a partnership between the World Resources Institute and the World Business Council for Sustainable Development, offers the most widely used greenhouse gas accounting standards for corporations. Under GHG Protocol definitions, Scope 1 emissions refer to a company's direct emissions in the course of doing business, while Scope 2 refers to "indirect emissions" like the purchase of energy. Scope 3 emissions are all others in the value chain, including the emissions related to the acquisition of supplies and the emissions related to the use of a company's products. 

The definitions list 15 categories of value chain emissions, ranging from purchased goods and services and upstream transmission and distribution to employee commuting and business travel. On the consumer end, emissions can include distribution and processing of sold products and end-of-life treatment of products.  

Brandon Owens, who led the sustainability program for General Electric from 2013-2017 and is now vice president of sustainability at Insight Sourcing Group, said that meeting Scope 3 goals gets increasingly difficult because companies have less control. "The more the boundaries move outside your system, the less power and less effectiveness you have," Owens said. While there is "cutting edge work" being done across several industries to measure and reduce those emissions, he said, Scope 3 is also where many companies have the most potential for improvement. The California state Senate has even approved a bill that would require companies with more than $1 billion in annual revenue doing business in the state to disclose their supply chain emissions.

The utility industry, however, faces particular challenges in following any of the GHG reporting guidance. For one, its unique marketplace role means that its Scope 1 emissions are what most companies would consider their own Scope 2 sources, adding pressure to reduce them. Calculating the emissions from wholesale power transactions is also more challenging; the Electric Power Research Institute released guidance for that specific question along with the non-profit GHG Management Institute in 2019. 

separate guidance on GHG accounting for power providers from the Climate Registry notes that while Scope 1 emissions can be tackled by addressing generating sources, working on Scopes 2 and 3 will require action from transmission companies, independent system operators, distribution companies, marketers and retail providers to decarbonize their own operations.

EEI has operated a GHG emissions reporting tool for its member companies, which as of 2020 also includes Scope 2 emissions as part of a project done in association with the World Resources Institute.

Although U.K.-based National Grid said in 2020 that it would cut Scope 3 emissions 20% by 2030 as part of its 2050 net zero plan, Duke and Dominion are blazing a relatively new path for American utilities. 

Duke's announcement means that net-zero goals for the company's electric business will include emissions from the power it purchases for resale, procurement of fossil fuels used for generation and electricity purchased for its own use. It will also include upstream methane and carbon emissions related to purchased gas and downstream carbon emissions from natural gas customers.

Berger said the company will focus on two of the 15 Scope 3 emissions categories in the GHG protocol. The first, fuel and energy-related activities, represents emissions associated with electricity Duke purchases for resale and totaled more than 11 million short tons of CO2 equivalent in 2018. Duke will also look at the use of sold products, or emissions related to the use of natural gas delivered to end users, which amounted to nearly 20 million short tons in 2018. The two represent "a significant portion" of the company's overall Scope 3 footprint.

According to a Feb. 11 press release, Dominion will develop procurement practices that will require enhanced disclosures from upstream suppliers on emissions and GHG reductions. The company will also give preference to suppliers committed to net zero and who use responsibly sourced gas (natural gas verified by a third party for environmentally-friendly procurement), pursue clean hydrogen projects and advocate for energy reduction programs. By addressing electricity purchased to power the grid, power station fuel, gas distribution systems and consumption by natural gas customers, Dominion says it will tackle "nearly all" of the 26.6 million metric tons of Scope 3 GHG emissions listed in its 2021 climate report

"In the coming months, we'll continue gathering information, refining our projections and analyzing all the potential pathways to achieve our goals," said Dominion spokesman Aaron Ruby, who said more details will come with the company's next climate report.

Guidehouse's Vitoff said addressing customers' energy use could be challenging for utilities since it involves the load profile of customers and could mean everything from energy efficiency offerings to installing more renewables to meet higher demand. For regulated utilities, she added, meeting Scope 3 goals might require "regulatory and policy enables that don't currently exist," especially when decarbonization involves potentially higher costs.

Emily Fisher, senior vice president of clean energy for EEI, said the trade group remains more focused on reducing emissions from generation. Looking at lifecycle emissions, especially for the complicated utility and generation sector, she said, is "best done on a voluntary approach."

In a June 2 letter to the Securities and Exchange Commission regarding ESG disclosures — including lifecycle emissions — EEI said it wanted "industry-specific metrics" that would account for the unique features of electricity generation. Fisher said that also applies to Scope 3 emissions, given the lack of consistency in measuring them. The group has recommended the inclusion of Scope 2 disclosures, however.

"Getting overly wrapped around the axle on Scope 3 is a bit like missing the forest for the trees," Fisher said. "Focusing on Scope 1 would be so significant from a climate perspective. That's the most impactful thing we can do for the climate at the moment."

Getting to zero

Typically, utilities' climate reports have shown that Scope 1 emissions are by far the largest sources of GHGs, with Scope 2 representing a tiny percentage. Dominion, for example, reported that in 2018, Scope 1 emissions totaled 34.4 million metric tons of CO2-equivalent, compared to less than 0.1 million metric tons for Scope 2. Duke reported 25,600 tons of Scope 2 CO2-equivalent emissions in 2018, compared to more than 105 million tons for generation the same year. 

That's made it easier for some utilities to wrap Scope 2 emissions into net zero goals. New Jersey-based Public Service Enterprise Group, for example, took that step as early as 2009 and now has a net zero goal by 2030 for both Scope 1 and Scope 2 emissions. Spokeswoman Marijke Shugrue said the inclusion was "a natural progression" after PSEG announced plans to sell its 6,750 MW PSEG Fossil portfolio in August 2021. Since setting that goal, PSEG has invested in its distribution and transmission infrastructure to avoid line loss while also making its own operations more efficient.

In September, the utility committed to the U.N. Race to Zero campaign and will set "science-based targets inclusive of all three scopes," said Shugrue, adding that PSEG is "still early in this process."

As global power and utility companies ramp up their climate work — a January 2022 report from Ernst & Young identified sustainability as one of the biggest factors in the sector's dealmaking. Still, EPI's Tait said expanded net zero goals can only do so much if utilities continue to rely on some natural gas or fossil fuel generation, regardless of offsets.

"At the end of the day, I hate to be trite, but we want absolute emission reduction," Tait said. "The key word in ‘net zero' is still ‘net.' Unless they can reduce all of their emission sources, then these goals are essentially press releases."

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