Reducing emissions to deliver net zero
To align with EU and national mandates, most European utility companies have set clear targets to achieve net zero greenhouse gas (GHG) emissions between 2035 and 2045. However, progress to date has been slow, with challenges remaining across Scopes 1, 2, and 3. Utilities face a variety of challenges as they work to achieve their decarbonization targets through a gradual, cost-effective process with short- and medium-term goals. This Viewpoint outlines strategies to deliver success through a mix of proactive, passive, and reactive measures.
Because they are at the forefront of decarbonization, utilities need to move away from using fossil fuels (coal, oil, and natural gas) for energy generation while meeting increased customer demands arising from electric vehicles (EVs) and industrial processes. They must reduce GHG emissions around activities such as power generation while enabling residential and business customers to decarbonize. As utility companies work toward achieving their sustainability goals, they need to balance the challenges presented by energy affordability and supply security to ensure they remain financially strong.
Driven by EU/national regulations and growing customer pressure, European utilities have set clear targets for meeting net zero targets. Examples include:
On the positive side, GHG emissions across Europe’s electricity sector decreased by ~50% between 1990 and 2022, according to the European Environment Agency (EEA). However, more recently, high gas prices led to gas replacement with coal for power generation in many areas, meaning that GHG emissions actually rose by 9% between 2021 and 2022. To rebuild momentum and achieve net zero, utilities need to reduce emissions in all three scopes:
Reducing Scope 1 and Scope 2 emissions is a technological and financial challenge, particularly given the increased cost of replacing fossil fuels like natural gas with renewable power. Scope 3 is the largest source of emissions and also the hardest to change, as utilities are responsible for both greenhouse gases within their supply chain and emissions created through the use of their products by customers (e.g., burning natural gas for heating). Therefore, utilities will only achieve reductions to Scope 3 emissions by working closely with their upstream suppliers and downstream customers.
To achieve net zero targets, utilities should start by analyzing how they can reduce emissions across each individual scope.
Generally, decarbonizing the source of emissions within Scope 1 eases decarbonizing efforts downstream in Scope 2 and Scope 3.
Ninety-nine percent of Scope 1 emissions come from electricity generation and district heating operations, including centralized and decentralized power and heat generation units. The remaining 1% can be attributed to a utility’s vehicle fleets, which can be decarbonized by switching to EVs.
Eliminating emissions from electricity generation and district heating requires a focus on five pathways spanning four major areas (see Figure 1):
The above actions will help achieve carbon neutrality, but solutions vary in their technological readiness, commercial maturity, and cost.
They are also interlinked and rely on wider market trends. For example, many options to generate heat without GHG emissions depend on the availability of green heat sources, such as geothermal energy, rivers, or wastewater.
From a cost perspective, replacing all generation and district heating equipment at the same time would not be economically or operationally feasible. In addition, letting replacements wait until the deadline is near would be financially impossible due to the concentration of costs. Therefore, investments need to be balanced based on:
For example, a utility operator could immediately replace one of its four boilers in a district heating system and replace the other three as they reach end of life. When planning Scope 1 emissions reduction, it is important to start with the overall net zero target and then work backward to set short- and medium-term targets in order to guide plans and optimize economics.
Scope 2 makes the smallest contribution to utility emissions, comprising between 3%-10% of the total. Some emissions, caused by factors such as heat losses in district heating distribution grids and transmission losses in electricity distribution grids are unavoidable. However, utilities can improve performance and increase efficiency through a combination of digitalization, new equipment, and new technologies. Actions to focus on include:
Unfortunately, as long as fossil-generation assets remain active and connected to the grid, operators will face emissions caused by physically unavoidable losses. This also applies to assets not belonging to the utility as is common in, for example, electricity generation. Thus, measures in grids should be chosen selectively considering limited budgets. For the remaining emissions, which cannot be mitigated, utilities can act reactively and buy carbon credits to compensate for these losses, as described later in this Viewpoint.
Scope 3 needs to be a key target for utilities, as this category makes up around two-thirds of emissions. It covers both the electric and natural gas provided to business and residential customers. Decarbonization can be achieved through a mixture of passive, reactive, and proactive measures (see Figure 2). Additional general best practices for Scope 3 reductions in procurement can be found in the Viewpoint “From Source to Sustainability: Decarbonizing the Supply Chain.”
Focusing on decarbonized sales activities and implementing proactive measures requires greater investment but may position the utility as a market leader and differentiate it from competitors in the minds of customers and regulators. Proactive measures may also create new revenue streams; energy efficiency consulting is one potential offering.
Utilities can ensure that they only supply green electricity by producing it themselves or procuring it on the open market. They can achieve this by expanding their own solar and wind facilities to avoid the need to buy additional GHG-emitting supplies or sign power purchase agreements with green generators to guarantee net zero upstream procurement. The companies can also work downstream with customers to help them improve their energy efficiency and usage through a mix of technical and strategic consultancy. Possible measures can include encouraging customers to generate their own green energy (e.g., through rooftop solar or wind turbines) and meeting any remaining electricity needs via a green electricity contract or offering them new products (e.g., thermal energy storage or energy recovery systems).
In the gas market, utilities can reduce the percentage of GHG-emitting natural gas provided to customers by sourcing and blending low- and/or zero-carbon gases, such as biomethane or green hydrogen, into their supplies.
The overall energy landscape is changing dramatically; looming regulatory objectives have spurred producers to increase the availability of renewable electricity supplies. For example, the EU has set a target of getting 42.5% of its electricity from renewable sources by 2030. Germany is aiming for 100% by 2045. Sweden, Finland, and Latvia have already made progress, generating 40% of their final consumable energy from renewables. This means that if a utility buys a percentage of its electricity on the open market, it is now significantly more likely to be from renewable sources, rather than fossil fuel sources, which passively lowers upstream Scope 3 emissions.
The market is also seeing a switch away from natural gas, driven by increasing restrictions on installing or replacing natural gas-powered boilers and higher customer prices for natural gas due to growing carbon taxes. Scope 3 emissions for utilities are expected to fall in conjunction with natural gas usage volumes. For example, recent studies in Germany predict a reduction in gas demand between 70% and 90% by 2050.
Natural gas is a core source of utility company earnings, which means they need to balance the need to meet short-term revenue targets with progress toward decarbonization. Switching from natural gas to green heating by replacing fossil fuel boilers with heat pumps and extending district heating grids will take time. Voluntarily compensating for short-term emissions with carbon credit certificates is therefore a potential reactive option. In the past, this has been achieved primarily by buying carbon credits or certificates for natural gas, as part of a balanced approach, focusing the use on emissions that otherwise cannot easily be removed, such as Scope 2 losses from grid operations, as explained in the Viewpoint “Navigating the Voluntary Carbon Credit Market to Support Net Zero Targets.”
However, there is a significant danger that widespread carbon credit buying will be revealed as greenwashing, particularly given concerns across the industry around their quality, with a July 2024 report from the Science Based Targets Initiative (SBTi) describing carbon offsets as mostly “ineffective” based on the evidence it reviewed.
A stronger reactive option for utilities is to purchase white certificates created under the EU’s Energy Efficiency Certificates (EEC) mechanism (see sidebar) to target Scope 3 emissions. White certificate regulations have been implemented in France, Spain, Poland, and Italy, with other EU countries expected to follow.
Understanding white certificates
The EU’s Energy Efficiency Directive has set an overall target to reduce energy consumption by 11.7% by 2030. To adhere to the directive, individual countries must meet national targets. EECs are electronic documents that record a company’s annual savings in energy consumption that arise from its energy-efficient actions. One EEC is the equivalent of 1 kWh saved. EECs are transferable assets that can be held and used internally or sold to a third party. To offset its emissions, a utility in a country covered by EEC legislation could purchase white certificates from its customers to reactively compensate for its own Scope 3 emissions. However, in the same way that carbon credit usage should focus on activities that cannot otherwise be decarbonized, the use of white certificates should also be used in a targeted manner to avoid accusations of greenwashing.
Countries that have adopted the EU’s EEC mechanism can use it to set individual targets for gas/electric utilities and wholesale petroleum/liquefied petroleum gas product operators, charging them to reduce the energy consumption of their customers (i.e., the operator’s Scope 3 emissions). Failure to reduce consumption leads to fines on utilities. However, any company (including customers) that successfully implements an energy-efficiency project can obtain and then sell EECs or white certificates from their national regulator.
Clearly, decarbonization activities will financially impact both operating revenues and the investment needs of utilities.
Lower demand for natural gas reduces a utility’s income from sales and grid operations moving forward. Shifting purchases from fossil fuel-generated electricity to renewable sources also increases costs and impacts margins. Moving forward, these actions need to be factored into forecasts and plans. To compensate for these negative impacts, utilities should look to build renewable commodity offerings and decentralized renewable energy solutions to stabilize their earnings while driving decarbonization. They also need to work closely with downstream customers to provide them with renewable solutions and consultancy on top of existing decarbonization measures.
Reducing emissions in all three scopes requires significant, long-term financial investment. Expanding electricity and district heating grids, building renewable energy assets, switching from fossil fuel–powered heating to zero-emission heat pumps, and increasing the energy efficiency of customers all require a level of investment that utilities cannot afford to do all at once. For example, Arthur D. Little (ADL) analysis shows that a typical energy (electric and natural gas) utility with annual revenues of €1.5-€2.5 billion (~US $1.6 billion-$2.7 billion) needs to invest €2-€3 billion (~US $2.3 billion-$3.5 billion) to achieve net zero by 2040.
Though decarbonization efforts will put pressure on revenues and balance sheets, utility companies must be proactive. This enables them to screen technological and commercial developments and make educated decisions on where and when to invest. Utilities can then apply a phased approach, setting short- and medium-term goals across various parts of their operations.
This allows for a balance between proactive measures and passive measures to utilize market transformation toward green energy, as in grid operations.
Figure 3 shows how a utility’s strategy and investment decisions will lead to a quick decline in GHG emissions of between 30%-40% by 2030 and 60% by 2035. The most difficult areas to decarbonize are left until the years immediately preceding the target, when new technology solutions may have emerged and matured sufficiently to deliver results. Having a clear, concrete strategy is also critical to enabling utilities to raise additional financing through new investors in specific assets and infrastructure, for example.
cloud technology axon
Headquartered in France with an established footprint across the Unite...
