Energy supply scenarios for the determination of Scope 2 emissions

published on 18 February 2025 I reading time approx. 5 minutes

Greenhouse gas accounting (GHG accounting) forms the basis of many reporting obligations in the ESRS (European Sustainability Reporting Standards). As part of the CSRD (Corporate Sustainability Reporting Directive), greenhouse gas emissions are to be determined in accordance with the Greenhouse Gas Protocol (GHG Protocol) – the globally recognized standard for the preparation of greenhouse gas balances. Under the disclosure obligation E1-6, the ESRS requires, among other things, that reporting companies must disclose their Scope 2 emissions. The aim of the disclosure requirement is to create an understanding of how the energy used, purchased or received by the reporting company indirectly contributes to climate change. In our article, we explain what companies need to consider when determining their Scope 2 emissions.

Scope 2 category in the GHG Protocol

The GHG Protocol divides emissions into three areas: Scope 1 comprises all direct emissions (e.g. from own energy generation at the site), Scope 2 all indirect emissions resulting from energy use (e.g. purchased energy) and Scope 3 all other indirect emissions along the company's value chain.

The Scope 2 category includes emissions that arise from the generation of electricity, steam, heat or cooling purchased or otherwise brought within the organizational boundaries of the company. The reference to generation is important here – other emissions that arise during the upstream production and processing of fuels or during the transmission and distribution of energy are recorded under Scope 3.

In principle, energy consumption that is not covered by our own generation units is recorded as energy purchased from the grid in Scope 2. In accordance with the GHG Protocol, a distinction is made between the location-based method and the market-based method for calculating emissions.

The location-based method quantifies Scope 2 GHG emissions on the basis of average emission factors of energy generation for specific areas, e.g. local, subnational or national boundaries. The market-based method, on the other hand, refers to the GHG emissions of the energy producers from whom the reporting company actually purchases electricity and with whom a contractual relationship exists.

Allocation of emissions by electricity generation and distribution method

Generated electricity is either consumed on site, transmitted directly or distributed via the electricity grid. These options determine whether emissions from energy generation by companies are recorded in Scopes 1 and 2. The following scenarios are intended to illustrate the options for allocation to the respective scopes.

Scenario 1: Electricity from own plants

If the electricity is generated and consumed within the same unit, no Scope 2 emissions are incurred for this energy. In this case, the emissions produced during electricity generation, for example by a combined heat and power plant, are recorded under Scope 1. For a technology to be included under Scope 1, it must itself cause emissions. A distinction between the market-based and location-based methodology is not necessary in this scenario.

Scenario 2: Electricity from direct energy transmission

If a company generates the energy and supplies it directly – without using the public electricity grid – to another company, the resulting emissions are recorded by the producer under Scope 1. The company that receives the energy takes the emissions into account in its GHG balance under Scope 2. Energy can also be generated on the premises of the supplied company, while another company exercises financial and operational control over the generation, e.g. in the case of on-site PPAs (power purchase agreements) or contracting systems. A distinction between the market-based and site-based methodology is not necessary in this scenario.

Scenario 3: Electricity from the public grid

Companies usually cover their electricity consumption via the public electricity grid. Electricity producers report all emissions from generation in Scope 1. However, when using renewable technologies, in most cases no emissions from electricity generation are reported. This is why different electricity suppliers – depending on their generation portfolio – have different emission factors at regional level, which are passed on to the respective electricity customers.

As electricity purchased from the public grid is fed into a common grid by all producers, the respective consumers cannot determine which power plant or producer actually produced the energy they consumed at a particular time. For example, a regional supplier may state that its electricity generation comes exclusively from renewable energy and therefore has an emission factor of “0”, while customers continue to draw their electricity from the public grid into which all generators feed their electricity – including generators that use fossil fuels to produce electricity.

In order to take this situation into account appropriately, electricity purchased from the public grid should be accounted for using both the market-based emission factor, which reflects the generation portfolio of the respective contractual partner, and a location-based emission factor, which includes the entire public grid, for example at national level. The disclosure of both values is mandatory under ESRS and must be stated accordingly in the CSRD report.

Scenario 4: Electricity from own plants and from the grid

There are many companies that generate electricity at their sites using their own systems, e.g. photovoltaic or CHP systems. The company can consume all or part of the energy generated by its generation plants itself, feed surplus energy into the grid and purchase additional electricity from the grid to cover the remaining energy requirements.

In this case, both Scope 1 emissions from energy generation and Scope 2 emissions for the energy purchased from the grid must be quantified. The company's total energy consumption includes the energy it generates itself (all emissions reflected in Scope 1) and all electricity purchased from the grid.

Here, companies tend to offset the amount of electricity they feed into the public grid with the amount they purchase in order to improve their carbon footprint. This type of offsetting is not permitted in the context of GHG accounting under the GHG Protocol.

In CSRD reporting, which refers to the requirements of the GHG Protocol, the electricity actually consumed by the company counts towards the calculation of emissions. Therefore, the amount of electricity fed into the public grid (e.g. from the company's own PV system) cannot be taken into account, as the electricity generated does not count as “used” energy in the sense of the Scope 2 emissions calculation. Only if the electricity generated is consumed by the company itself is it included in the CO2 balance under Scope 1, as described under Scenario 1.

The following applies to balancing: as the electricity generated is not consumed directly by the company, it cannot contribute to reducing the company's Scope 2 emissions. Any energy consumption that is not covered by the company's own generation units or purchased via a direct line (see Scenario 2) should be treated as energy purchased from the grid in Scope 2 and calculated in accordance with the GHG Protocol using both the location-based and market-based methods.

Conclusion

When determining Scope 2 emissions, companies must take into account who generates the energy and how it is distributed. In principle, emissions that arise from the company's own energy generation and are used directly by the company are recorded under Scope 1. On the other hand, emissions from externally sourced energy are accounted for under Scope 2. If a company generates renewable energy that is not consumed on site but is fed into the public grid, this cannot be used to reduce its own Scope 2 emissions.

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