Utility decarbonization strategies: A portfolio-based approach to emission reductions

Decarbonization represents a significant challenge and opportunity for utilities. It involves a broad range of initiatives spanning operational changes to customer influence and engagement. Taken as an opportunity, trends such as the shift to renewable energy and transportation electrification enable cost reductions and growth potential. But the challenges to fully decarbonize utilities are vast, particularly when considering the regulatory and societal drivers that are creating urgency to achieve carbon reduction on rapidly shortening timelines. 

The variety of decarbonization initiatives requires that utilities reduce both their internal and external carbon emissions. Every utility has a different ecosystem of GHG emissions and air quality drivers, varied regulatory mandates, and differing approaches to reduce carbon. 

Because the challenge of decarbonization is so broad and spans so many departments and initiatives, a portfolio-based approach is the way to best achieve emissions reduction goals. This approach to decarbonization requires: 

1. Segmenting diverse decarbonization opportunities into functional categories 

2. Assessing a broad spectrum of initiatives to reduce carbon 

3. Developing a ranking of portfolio methods and initiatives using metrics that include achievable reduction quantities, lowest cost to achieve, and viability.  

By using this type of approach, decarbonization methods can be directly compared based on the most important factors, including: 

• Carbon reduction potential (tons of avoided CO2e) 

• Cost per ton of carbon avoided ($/ton of avoided CO2e) 

• Organizational or process Impacts 

• Social or community impact 

• Risks to achieve each reduction goal 

Segmenting and assessing decarbonization efforts to better understand your options 

Taking a metrics-driven, portfolio-based view of GHG reduction can help utility sustainability teams prioritize their decarbonization investments and develop a strategic roadmap for achieving targets. By segmenting decarbonization efforts into practical categories and assessing them on common and standardized metrics, utilities will have a better understanding of their options to decarbonize, greater access to comparative data, and more information to make smarter decisions. 

This can improve the chances of success to maximize GHG emission reductions over time. Selecting the right combination of decarbonization measures—and having a comprehensive strategy to implement those measures—is critical to successful decarbonization. The ideal strategy ultimately will achieve the highest overall emissions reduced with low risk and low or recoverable costs. 

A sample breakdown of segmenting decarbonization opportunities might look like this: 

• Category 1—Power delivery operations: Generation, transmission & distribution, grid modernization 
• Category 2—Company operations: Fleets, buildings, data centers, facilities, employee behavior 
• Category 3—Customer GHG: Customer emissions that can be impacted by utility efforts 

Utilities must identify and quantify the emissions sources or avoidance methods within each category once they have been established. Calculation frameworks such as the GHG protocol and Science Based Targets Initiative provide methods for doing these calculations, but collecting the necessary data and ensuring accurate and verifiable results require significant effort. Additionally, methods for mitigating emissions must also be assessed according to the risk factors involved, cost to avoid carbon per method, viability of available technology, and impacts to customers or utility operations.  

Once all options are understood, they can be compared and considered as a holistic portfolio strategy. Part of this process is understanding how implementing certain initiatives might interact with others. For example, deploying large amounts of renewables on the grid will make transportation electrification efforts more impactful when highly clean electricity is a fuel source. Understanding these nuances enables a more sophisticated approach to decarbonization efforts. 

Category 1: Power delivery operations 

Electricity generation, which accounts for 25% of annual GHG emissions, is the largest source of carbon emissions in the U.S. and makes a significant amount of a utility’s carbon emissions. Even if a utility company does not generate their own electricity, generation emissions from delivered and used electricity falls under the utility’s scope 2 or 3 emissions.

The leading method for utilities to reduce their generation carbon footprint is to deploy renewable energy assets at scale while reducing coal generation. Other strategies include replacing coal generation with lower carbon intensity natural gas generation.  

Adoption of renewable generation has been increasing since the early 2000s, driven by federal incentives, and recent analyses have shown that the Levelized Cost of Energy (LCOE) of solar and wind is now lower than that of coal and combined-cycle gas, with rates for renewable energy generation falling over 80% for solar panels and 38% for wind turbines since 2009.  

Growing renewable adoption and continued regulatory support means that costs of renewable generation will continue to be competitive with fossil fuels. However, there are several challenges that utilities must consider when scaling these assets: Grid reliability is front and center with both solar and wind having variable energy outputs, and with peak generation from these assets not aligning with peak demand, the buildout of additional grid infrastructure is oftentimes necessary. Other risks utilities must consider when assessing renewable energy deployment include intermittency and transmission constraints to remote wind and solar farms. As seen in Figure 1, renewables and natural gas generation are forecasted to grow strongly as coal and nuclear decline to a baseline level of roughly 10% of the mix by 2050. Policy drivers aimed at lessening the impact or renewable generation and encouraging decarbonization of utilities have recently been introduced by the Biden administration’s goal of reaching 100% carbon pollution-free electricity by 2035 and as detailed in the recent Infrastructure and Jobs Act (IIJA) passed by congress. 

Category 2: Utility company operations  

Utility operations are the smallest category of utility emissions, primarily consisting of the utility’s vehicle fleets, facilities, and supply chains. To accurately quantify a utility’s emissions, the scope framework created by the Greenhouse Gas (GHG) Protocol, an international organization that provides standards, guidance, and tools to measure and manage climate warming emissions, should be leveraged. The GHG Protocol groups emissions into three unique categories: 

• Scope 1: Direct emission sources from stationary combustion, mobile combustion, process emissions, and fugitive emissions 
• Scope 2: Indirect emission sources from the consumption of purchased electricity, heat, or steam 
• Scope 3: Indirect emissions from a company’s upstream and downstream activities as well as emissions associated with outsourced/contract manufacturing, leases, or franchises not included in Scope 1 or Scope 2 

When it comes to utility operations, a utility’s fleet and direct facility emissions would fall under Scope 1, while supply chain emissions would fall under Scope 3. By utilizing the GHG Protocol to properly categorize internal emissions, utilities are better positioned to address and manage their decarbonization goals. 

There are a wide variety of emissions profiles due to their operating structure for a utility’s facilities, primarily due to energy markets regulations requiring separate generation and transmission for regulated utilities. For this reason, regulated utilities who do not generate their own energy only need to consider their energy and water use at their facilities as part of their operations. A key takeaway that utilities can leverage is to understand that the energy efficiency, renewable energy procurement, and transportation electrification programs that they provide to their customers can also inform the utility’s own operational decarbonization.  

Category 3: Customer emissions influenced by utility programs 

While the emissions of utility customers are not directly attributable to utilities, and can’t be claimed as utility emission reductions, there are a variety of ways that utilities can impact the emissions of their customers. In 2019, demand-side management programs saved 30 million megawatt hours (MWh) of electricity through demand response and energy efficiency programs. These program outcomes show the impact coordinated efforts can yield in reducing the demand for energy, which allows for less emissions.  

Utilities are in a unique position to help facilitate these types of demand-side programs, due to the high-level energy consumption data they compile, helping customers coordinate and align with energy usage opportunities. They are often in a better position to facilitate decreased energy demand, because utility customers are challenged with data ownership and access issues. Utilities are also positioned to influence customer emissions by providing pathways to new technologies and influencing energy consumption practices.  

Electrification of previously fossil fueled equipment is a trend that is commonplace with advances in battery storage, energy efficiency, and renewable energy proliferation. Complementing and enhancing electrification of operations are customer investments in energy resources, such as using battery storage to shave peak demand, improve resiliency, and investing in onsite renewable energy generation.  

Depending on the makeup of a utility customer base and the regulatory environment of their state, utilities might even be required to assist or educate their customers on adopting new technologies to help reduce emissions. Identifying the right technologies and customers to target can be a challenge and will be unique to each utility based on how and where the utility operates and the technological and market characteristics of the solution. Regardless of these factors, employing electrification as a carbon-reduction strategy relies on utilities ensuring a low carbon or zero carbon generation mix to make the electrified processes and equipment a truly cleaner alternative.  

Expanded influence of customer emissions requires utilities to increasingly target programs to encourage customer to change energy use or adopt new technologies. Utilities have direct data to identify their biggest impact areas for decarbonization potential, but in the U.S. electric vehicle progression has stirred conversation with large emission reductions in transportation from 2019 to present day. There is a need to reduce emissions in industry and commercial and residential areas to account for nearly half of the 2019 U.S. emissions.

Understanding the emissions reduction potential from customer behavior and energy use change enables utilities sustainability teams to align utility programs that best influence customer decarbonization efforts. This can include traditional energy efficiency and demand management programs, as well beneficial electrification programs including transportation and building electrification.  

In addition, models and digital tools are available to support the effort to assess both the economic and environmental impacts of implementing various decarbonization strategies, streamlining the effort to quantify upfront and ongoing project costs, project timelines, and scope of operations.  

Conclusion 

The decarbonization challenge is growing as a matter of state regulatory and legislative compliance as well as societal demand for many utilities. A broad portfolio of initiatives, technologies, and customer programs are available and accessible. A key question is deciding what the optimal portfolio looks like, viewed through the lens of GHG reduction attainment, comparative cost per ton per method, viability, social equity, and risk factors. Because every utility is unique, each must consider how their unique business circumstances can leverage a portfolio-based approach to meet the decarbonization challenge.