Green tariffs (Part 1 of 2): When your green tariff isn't really green

Green tariffs have become increasingly popular in the past decade, with over half of all new UK energy tariffs launched marketed as ‘green’. As more businesses look to reduce their carbon footprint on the path to Net Zero, green tariffs appear a good option for tackling electricity-related emissions. This is particularly true for SMEs, where alternatives such as onsite renewable generation or direct contracts with renewable energy generators (called Power Purchase Agreements or PPAs) are less feasible.

However, as the green tariff market has grown, it has come under criticism from consumer rights organisations, green energy thinktanks and government. In 2021, the UK government announced a review of green tariffs in light of concerns that many energy suppliers are ‘greenwashing’ their customers, overstating the environmental credentials of their tariffs. Energy suppliers are requesting clarity from regulators on the definition of green in the energy market, and Ofgem has acknowledged ‘we do not have sufficient evidence that existing renewable tariffs provide additional environmental benefit beyond existing renewable generation.’

This lack of transparency creates risk for businesses that have, with good intentions, adopted green tariffs as part of their sustainability strategy and marketing: can they be sure that they are not misleading their customers and suppliers?

Firstly, clearing up a common misconception

All companies deriving electricity from the grid (not for instance via private on-site generation e.g. solar panels) consume the same mix of fuels, the aggregate mix of the grid, to generate their electricity, regardless of tariff. Customers connected to the grid do not consume the actual fuel mix that they purchase - there is no 'direct connection' from your supplier to your location. As a result, your gross electricity-related emissions don’t vary with the tariff you choose either.

Instead, demanding renewable energy via a green tariff sends a signal to the market which, directly or indirectly depending on type of tariff as explained later, increases the proportion of renewables in the national energy mix and reduces the emissions of all grid users collectively over time. Demand for green energy is therefore a vital part of the Net Zero transition.

The key question is: are green tariffs an effective mechanism for turning demand for renewable energy into genuine decarbonisation?

So, what’s the issue with current green tariffs?

The basic problem is that when an energy customer invests in a green tariff, the energy supplier does not necessarily fund new development of renewable energy capacity (termed ‘additionality’). It is not always the case that there is more renewable capacity, therefore reduced emissions, as a result of a green tariff purchase. However, not all green tariffs are equal – there are 3 broad types, each with different implications for the planet.

1)     Unbundled REGOs

Under the current system, when a producer (e.g. a solar or wind farm) generates a MWh of renewable energy, they are issued a ‘Renewable Energy Guarantee of Origin’ (REGO) by Ofgem, a certificate that verifies the origin of the energy. Established in 2003, the system is designed to enable energy suppliers to submit REGOs to Ofgem as part of their Fuel Mix Disclosure to evidence that the amount of renewable energy they supply is enough to meet their commitments, such as those made to their customers through green tariffs.

To deliver renewable energy to customers, an energy supplier can generate renewable energy and the corresponding REGOs by developing renewable infrastructure themselves, or invest in long-term contracts (PPAs) with third-party generators.

However, there is a third option. It’s currently possible under Ofgem rules for energy suppliers to purchase a REGO from an energy generator, but not the corresponding MWh of renewable energy. These ‘unbundled’ REGOs are traded on a secondary market at a fraction of the price of the energy they represent. A supplier can therefore sell fossil fuel-based energy under a green tariff by simply ‘matching’ the energy sold with REGOs.

Energy supplier Bulb (now part of Octopus) has been criticised for claiming to supply 100% renewable energy whilst purchasing most of its supply from the wholesale market, a mix of energy available at that time including fossil fuel-generated, then backing up purchases with unbundled REGOs. A recent report by Baringa found that Bulb backs only 4% of green tariffs with PPAs with generators. Bulb itself claims to have enough PPAs to account for up to 40% of its capacity. In failing to invest in PPAs, energy suppliers do not provide generators the revenue certainty needed to develop new renewable capacity.

‘Unbundled’ REGO purchases are broadly criticised as misleading, undermining trust in the energy system, and a missed opportunity to translate genuine consumer demand for renewable energy into decarbonisation.

2)     Mixed energy supply

Some energy suppliers do purchase ‘bundled’ or PPA-backed REGOs: the same Baringa report found that ScottishPower backs 100% of its green tariffs with PPAs.

ScottishPower is an example of an energy company with both fossil fuels and renewables in its energy mix, offering both green and brown tariffs. Supplier fuel mix is influenced by factors including energy price, government rules and incentives, and customer demand for green tariffs.

Suppose that an electricity customer of a mixed (renewables + fossil fuels) supplier switches from a brown to a green tariff. Does this mean that the supplier must purchase/generate additional renewable capacity to match this customer’s demand? Unfortunately, not necessarily – as long as the supplier has enough green energy in its mix to meet the new green tariff commitment it can simply shift or allocate existing green energy away from a brown tariff customer to the new green tariff customer. It doesn’t need to invest in more renewable energy.

This form of green tariff can still be effective: if a supplier has more customers on a green tariff than it sources green energy for, it will need to shift its fuel mix towards renewables. However, the mechanism is indirect and doesn’t guarantee additionality. Moreover, government funding of renewable energy in the UK means that supply of renewable energy typically exceeds customer demand, so that new green tariffs can make little/no difference to renewable capacity.

3)     New renewable capacity

Genuinely additive green tariffs do exist. A handful of energy companies deliver tariffs that invest in new renewable capacity, either generating electricity themselves or sourcing directly from generators via PPAs, long-term contracts that drive investment in renewable infrastructure by providing generators with revenue certainty. These suppliers deliver 100% renewable energy (not mixed supply / brown tariffs), and purchase bundled REGOs (certificate + PPA).

At the time of writing, Ofgem has recognised 3 such energy suppliers (Ecotricity, Good Energy and Green Energy), finding that ‘by consumers being on the tariff, support is given to renewables to an extent that is materially greater than that which is brought about as result of subsidies, obligations or other mandatory mechanisms.’

How to communicate your impact, and break the greenwash cycle

The first step is to examine the claims made by your supplier: what exactly do they guarantee to deliver as a result of your green tariff purchase? Unfortunately, the problem with the energy market as it stands is that this is easier said than done! Energy greenwashing is an active topic, with suppliers arguing amongst themselves about the validity of competitors’ green credentials. The market is ripe for better regulation – customers shouldn’t be responsible for navigating claims that even domain experts find challenging to test.

As a result, your approach to green energy communications should be conservative: only advertise what you know to be true.

Choose language such as:

- ‘We’ve adopted green tariffs in our locations, helping to drive the transition to renewable energy production.’

Rather than:

- ‘We use 100% renewable energy’ – not true if you use grid energy.

- ‘We are backed by 100% renewable energy.’

Providing more detail on your energy tariff, highlighting both benefits and caveats, is also a good way to build trust in your communications.

At Seedling, we keep on top of industry developments and help you to take a more informed view of the green credentials of your energy supplier. We then work with you to develop considered communications that your customers and suppliers can rely on.

A note on price

At the time of writing, energy costs are front of mind for consumers and businesses. The suppliers referenced as providing additionality (Ecotricity, Good Energy and Green Energy) have been derogated from price caps, meaning the price cap does not apply to them for a given period. Ofgem took this decision to support renewable investment, however it means these suppliers may be priced higher.

Despite the current lack of clarity, a green tariff purchase remains a good way to use your power as an energy consumer to signal demand for renewable energy investment.

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This isn’t a straightforward topic, so if you’re still unsure, we’d be happy to help. Get in contact at hello@seedling.earth.

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