Discovering the Path to Utility Supply Chain Decarbonization

Sustainability and decarbonization are growing trends in the energy industry, and electric utilities are no exception. Case in point: 29 out of the 30 largest utilities in the United States have a net-zero carbon goal, committed to reducing and offsetting emissions across Scopes 1, 2 and 3 by 2050—with some utilities committing to achieve it by 2030.

Initial decarbonization efforts focused on meeting these goals by reducing direct (Scope 1) emissions from generation or indirect (Scope 2) emissions by purchasing emission-free electricity. But net-zero commitments and growing requirements for emissions disclosure are driving emissions reductions throughout other utility operations—specifically utility supply chains. Scope 3 emissions—emissions driven by a firm’s supply chain—make up most organizations’ emissions. Because of this, companies across industries—including utilities—have increased focus to reducing Scope 3 emissions to reach net-zero goals.

Given the large number and diversity of utility suppliers for products and services, decarbonizing utility supply chains presents significant challenges—but there has also been significant progress in the last few years in identifying best practices to ensure companies realize success in drawing down Scope 3 emissions within their operations.

What do utility supply chains look like?

For electric utilities and power producers, supply chains are generally large due to the size of capital investment, depth, and breadth of operations, and the materials required for construction and operations and maintenance. Despite their large size, utility supply chains make up a lower-than-average percentage of the utility’s total emissions since fossil fuel generation of energy—one of the top emitters globally—is included in a utility’s Scope 1 or 2 emissions. The specific makeup of utility supply chains depends on the size of the utility’s territory, whether the utility is deregulated or vertically integrated, and the commodities of that utility.

While supply chain emissions make up a smaller proportion of emissions for the energy industry, supply chains still account for a significant portion of their total emissions and, depending on the utility, can range significantly in their percentage of total emissions.

Regardless of the percentage, most utilities have construction and construction-related activities as the largest bucket of the supply chain spend, with construction services and materials making up more than 60% of utility procurement budgets.

Where do emissions come from in utility supply chains?

Carbon emissions are generally measured in three scopes across industries (Figure 1). Of these scopes, an organization’s supply chain accounts for most of Scope 3 (indirect emissions). Supply chain emissions are calculated as the proportion of emissions from each supply chain node attributed to the organization’s purchased product or service. Historically, utility emission reduction focused on reducing generation emissions (which are included in Scope 1); however, the new focus is reducing utility emissions as a whole by addressing utility supply chains.

Figure 1: Breakdown of Electric Sector Scope 1, 2, and 3 Emissions

A company’s supply chain is one of the hardest areas to decarbonize because carbon reductions depend on the activities of suppliers and outside entities rather than direct changes—there are also myriad activities included in the calculation of Scope 3 emissions. While any of these activities may contribute to a company’s Scope 3 emissions, the activities with the highest percentage of emissions vary greatly based on industry or other factors like geography and supplier selection (for example, gas utilities have significant Scope 3 emissions from use of their sold product since the combustion of gas happens once the gas is purchased by customers).

Establishing emissions baseline and tracking progress

The Securities and Exchange Commission (SEC) is expected to finalize stricter climate disclosure rules for publicly traded companies this fall—with an expectation that companies not directly impacted by the SEC ruling will still feel effects due to setting standards across the industry. In preparation for these rulings, organizations (including utilities) not currently tracking their Scope 3 emissions should begin dedicating resources, creating processes, and gathering the necessary data to ensure compliance.

Within the proposed rules the SEC details clear compliance for Scope 1 and 2 emissions, with Scope 3 emissions reporting only required from companies whose investors require it—or that have already publicly set Scope 3 emission reduction goals. Investor-owned utilities (IOUs) and their suppliers should expect to be impacted by this ruling, and potentially need to begin preparing for these increased disclosure requirements.

To decarbonize a supply chain, organizations must first understand the baseline emissions or the emissions currently generated from their supply chain activities. This begins with gathering the data of emissions. Supplier emissions need to be calculated either by getting the emissions data directly from suppliers (the most accurate, but often unavailable), by using industry-accepted emissions estimates per unit of a good or service purchased (a more available and still fairly accurate method) or using an emissions-per-dollar-spent estimate per supplier (least accurate measurement). Both activity-based and spend-based emissions factors are available through GHG protocol and the Environmental Protection Agency (EPA).

The separation of Scope 1, 2 and 3 emissions for utilities are particularly important in the baselining process. As utilities reduce their Scope 1 and 2 emissions by generating or procuring more renewable energy, supply chain emissions can be hidden in the overall emissions data. By considering each emission scope separately, utilities can get an accurate idea of emissions trends, and where attention should be focused to make an impact.

Once the emissions baseline is completed, emissions are tracked on an annual basis to determine trends and identify opportunities to begin reducing emissions. Companies can elect to track and report their annual emissions through a reporting framework such as the Carbon Disclosure Project (CDP) or The Sustainability Project (TSP). These reporting frameworks allow companies to compare their Scope 1, 2 and 3 emissions to others in their industry and track year-over-year progress.

Key initiatives to reducing supply chain emissions

Once a baseline has been established to understand emissions sources, the next step for supply chain decarbonization is analyzing each Scope 3 category and implementing initiatives to decrease emissions. It’s critical to ensure there are systems in place to monitor and track progress of initiatives. Since Scope 3 emissions are all generated indirectly and outside of the company’s control, this requires collaborating, educating, and partnering with suppliers.

Some typical decarbonization initiatives for Scope 3 include:

1. Building a supplier sustainability engagement program to partner with suppliers to reduce emissions. The highest bucket of emissions is typically generated in the purchased goods and services category, so partnering with suppliers is critical to reducing Scope 3 emissions. A typical supplier engagement program consists of drafting, communicating, and having all suppliers sign a supplier code of conduct, which includes annual emissions reductions or other sustainability targets that the supplier must meet.

2. Embedding sustainability into procurement and supplier management practices.This can include initiatives such as procurement targets around purchasing sustainable goods or imposing buying restrictions for certain goods if they generate a high number of emissions. As many utilities are accountable for meeting defined supplier diversity requirements, these sustainability requirements will need to be met alongside—not instead of — existing diversity requirements.

3. Reducing waste through process optimization. Another large category of Scope 3 emissions is waste generated in operations. This can be done by directly reducing the amount of waste generated or by diverting waste streams to recycling or reuse streams. Lean Six Sigma is an established framework that outlines the eight distinct types of waste, helping firms understand where there is waste and how to optimize processes to drive efficiencies within their operations.

4. Optimizing supply chain transportation. Moving goods or people is an important part of supply chains and tends to emit a significant portion of GHG, given that most transportation is fueled by fossil fuels. Conversion of traditional fossil fuel fleets to electric or other low carbon vehicles can significantly reduce transportation emissions.

5. Assessing business travel needs and modes. Creating a business travel policy that includes not only a financial budget but also a carbon budget can reduce emissions from business travel. With the increasing accessibility of remote work since the pandemic, emission reductions can be considered when determining the necessity of employee travel or the travel of consultants or suppliers.

6. Digitizing processes to eliminate materials and inefficiencies. Digitizing processes such as billing, procurement, and inventory reduces the need for physical materials or improves efficiencies in using physical materials.

Challenges to supply chain decarbonization

While current trends are pushing organizations and utilities to decarbonize their supply chains, there are still many challenges to fully executing on their goals. Reducing Scope 1 and 2 emissions is more directly in a company’s control than Scope 3 emissions reductions, meaning many of the challenges in achieving Scope 3 reductions are unique. The main challenges include:

• Lack of standardization in processes and the necessary data required to support Scope 3 emissions reduction
• Decarbonization of supply chains requires alignment of internal stakeholder priorities
• Knowledge gap between suppliers and their customer Scope 3 emissions goals
• Certain products and services do not currently have a carbon-free alternative, or a viable solution to become decarbonized
• Supply chain decarbonization requires collaboration across internal and external stakeholders

Supply chain sustainability best practices

Many of the largest U.S. utilities have begun implementing sustainability efforts, and organizations like the Sustainable Supply Chain Alliance (SSCA) have created a framework for utilities to begin tracking supplier emissions through emissions reporting tools and provide a forum for collaboration. Many of the largest IOUs are members of this alliance, including AEP, Duke Energy, Exelon, PG&E, and Southern California Edison—all of whom have a standing commitment to achieving net-zero emissions.

We outline best practices that are a great start to embedding sustainability across entire organizations and achieving long-term, net-zero goals.

1. Improve data management standards and practices: Document data used for estimates, including data sources and type of data. From there, improve upon the data gathered to utilize more accurate calculation methods.
2. Increase supplier education and support: Work with your suppliers to understand the importance of decarbonization and educate on simple ways to reduce emissions.
3. Implement a supplier tracking platform or software: Utilizing a technology solution where suppliers submit their emissions directly to the firm for easy data analysis and consolidation when needed.
4. Designate a Chief Sustainability Officer (CSO): A CSO will help ensure the organization is viewing sustainability as a priority, and will drive and advertise the organization’s commitment to net-zero.
5. Add sustainability as a decision criterion to all decisions made: Most business decisions today are based off cost and speed, but business decisions of the future need to be based off cost, speed, and environmental impact.