Decarbonizing the Power Sector: A Strategic Analysis

Businesses increasingly want to buy clean electricity—especially as the fast expansion of data centers powering artificial intelligence pushes technology companies’ power demands to new heights. Unchecked, these increased power demands further threaten the world’s ability to meet climate targets. Whether to meet environmental, social, and governance (ESG) targets, cut costs, or hedge volatility, more companies are seeking to fully address their energy-related emissions.

Companies’ voluntary purchases of clean energy have helped speed the deployment of renewable-energy sources (RES), boost renewables supply chains, and reduce renewables’ costs. Such purchases have contributed approximately 200 gigawatts of capacity from RES over the past 15 years, which accounts for about 10 percent of globally deployed solar and wind.

But how to approach voluntary clean-energy buying and operate clean-energy assets are topics of intense debate.

The challenges of credibility and attribution

One prominent school of thought suggests that companies should demonstrate that each kilowatt-hour of energy they use comes directly from clean-energy sources, often at the time and place the energy is needed—so-called 24/7 carbon-free energy matching. This approach effectively attempts to treat a company’s electricity supply and demand as separate from the grid where it is connected. While 24/7 matching may offer a seemingly simple approach to managing emissions, our analysis shows that unilaterally applying this asset-level framework leads to unintended consequences that could slow decarbonization and undermine the approach’s intent.

Our findings suggest that companies seeking the most impactful clean-energy strategy should instead make power investments using an integrated, grid-level lens that encompasses the state, power market region, or even country in which they operate.

Optimizing at the grid level cuts more emissions

To understand the difference in emissions between an asset-level, 24/7 power-matching approach and a grid-level approach, we considered three scenarios in which batteries support a renewable-energy portfolio to provide dispatchable, clean power:

• 24/7 power matching. In this scenario, ten companies individually operate with 24/7 power matching using their own renewable energy and batteries.
• Economic optimization. The same ten companies manage their batteries at the grid level with the goal of maximizing the price of power sold to the grid.
• Emission optimization. The same ten companies manage their batteries at the grid level with the goal of minimizing overall emissions.

In this specific example, we found that scenario three—using batteries to minimize emissions at the grid level—cuts emissions by 380 tons of CO2 (tCO2) per year compared with operating renewables without dispatchable battery power. Minimizing grid-level emissions leads the system to charge batteries with clean electricity when it is available and discharge it when the marginal-energy supply is relatively dirty. Maximizing price cuts emissions because prices tend to be highest at peak-demand times when batteries displace dispatchable, dirtier power—typically coal or gas.

Looking beyond a company’s own grid

Taking an even broader view, companies can consider the power generation mix and grid emission rates in locations beyond their immediate use. For example, across the United States, there is a more than twofold difference in annual average emission rates (tCO2 per MWh) between the lowest- and highest-emission power grids. Companies could choose to support clean-energy projects in states with the highest-emission grids. This would cut significantly more emissions than procuring power in the cleaner grids.

A gridwide approach reduces costs, especially for residential customers

Power markets encompass large portfolios of customers, which allows the grid to operate with less redundancy in infrastructure. If every industrial site were truly islanded, it would need the ability to produce more than 100 percent excess capacity to account for unplanned or forced outages. With a large grid, however, the risk of outages is distributed and resource planners can target just 10 to 20 percent excess capacity.

The same logic applies to deploying clean, flexible resources on the grid. Serving a hypothetical set of ten companies using 99 percent clean power as an aggregated load costs approximately 22 percent less per MWh than serving loads individually. In one of our more intriguing findings, we observed many instances where batteries were operating against each other, creating waste through overbuild and unnecessary battery cycling.

How to maximize the impact of your clean-power strategy

Invest in cleaner generation for the grid at large

The clear conclusion from our analyses is that procurement and dispatch decisions made for the broader grid rather than individual customers cut more emissions, use power more efficiently, and lower costs. This approach benefits both participants and market operators. To maximize emission abatement, companies should dispatch their clean power using metrics such as locational marginal emissions (LME) or locational marginal price (LMP) across the grid.

Managing power at the grid level instead of via 24/7 power matching is also better “grid citizenship.” Too many companies trying to match their power use with RES on their own can put unexpected strain on the grid.

Cut and manage power demand

Companies should first look for opportunities to improve their energy efficiency, as many energy efficiency measures are low cost or offer a cost savings. Beyond this, companies could invest in demand-side flexibility—investing in behind-the-meter batteries and thermal storage, fuel switching, smart building management, production management, and other approaches that shift demand to times when renewables are available.

Build capabilities and implement with flexibility

To develop a strategy and execute it effectively, companies need a specific set of capabilities, including developing high-quality emission reporting, setting clear targets with a framework for regularly evaluating them, and continually revisiting where effort and capital are deployed.

Above all, act now

While goals such as “net zero by 2050” can be a helpful target to encourage action, the trajectory matters. Steadily eliminating emissions over time leads to less warming than waiting to cut them all. The urgency for carbon reduction in the near term cannot be lost.

FAQ

Q: How can companies maximize the impact of their clean-power strategy?

A: Companies can invest in cleaner generation for the grid at large, cut and manage power demand, build capabilities, and implement with flexibility.

Conclusion

Companies have a large role to play in decarbonizing the power sector. They are mobilizing vast sums of capital that, if invested thoughtfully, can bring significant emission reductions and societal benefits. Grid awareness—as well as decisive action and a willingness to form partnerships—will be especially important for companies seeking to make the biggest impact.