Carbon credits could soon help fund distributed clean energy projects

Canary Media’s Down to the Wire column tackles the more complicated challenges of decarbonizing our energy systems.

McGee Young, CEO of WattCarbon, believes he has a solution to two tricky climate challenges. Challenge No. 1: Carbon-offset markets are filled with dubious or allegedly fraudulent projects that don’t really reduce carbon emissions. Challenge No. 2: More investment is needed in distributed clean energy projects.

The answer? Create a new class of carbon offsets that fund investments to cut carbon emissions across hundreds or thousands of sites — and make this new offset market a model of transparency.

After all, why shouldn’t corporations be able to earn carbon-cutting credit for investments that help replace hundreds of residential fossil-gas furnaces with electric heat pumps? What about investments in helping homes and businesses avoid using electricity when fossil-fueled power makes up most of the grid mix, or building community solar projects in places with the heaviest reliance on fossil-fueled generation?

These kinds of distributed-energy investments are not part of today’s multibillion-dollar voluntary carbon-offset markets. But Young thinks they’re a much better option than, say, putting money into forest-conservation projects that don’t actually conserve forests, or into utility-scale wind and solar projects that have already been built or likely would have been built without the extra cash — two of the more common, and more problematic, types of offsets that corporate giants buy today in order to claim they’re making progress toward net-zero goals.

Residential and commercial buildings account for roughly 40 percent of U.S. carbon emissions, both from the fossil fuels they burn for heating, cooking and other purposes, and from the carbon emissions associated with the electricity they use. That means they should be a massive target for carbon-cutting investments, Young said. ​“How do we do that? I think we do it by turning buildings into decarbonization assets.”

In January, WattCarbon raised $4.5 million from venture investors to bring this new concept for a carbon-credit market to the next stage of development. Over the coming months, the company hopes to sign up the first corporate buyers for what it’s calling ​“clean energy credits,” Young said.

Initial partner companies planning to offer investment opportunities in the market include community-solar and renewable-energy developer Pivot Energy, demand-response aggregator Leap, home-electrification startup Elephant Energy and energy retailer Branch Energy. These companies are ​“putting portfolios of projects into our marketplace,” Young said. ​“You can buy 15 hours of demand response from Leap, or the RECs [renewable energy certificates] from a community solar project in the Midwest, or for heat-pump projects in Colorado.”

None of the projects that will appear on the marketplace have been built yet, and only those that need additional investment to move forward will be listed, he said. That assures that the investments provide ​“additionality” — a key term in the world of carbon offsets and renewable energy that means projects wouldn’t have happened without the investment. In other words, they’re adding new carbon-cutting value.

In return, investors will receive credits for future carbon-emission reductions from these projects, Young said. Replacing a gas furnace with an electric heat pump eliminates emissions from burning gas and replaces them with a smaller amount of emissions from the electricity used by the heat pump, for example. A community solar project replaces grid power of varying carbon intensities with carbon-free solar power, and a demand-response company’s dispatch signal for customers to reduce electricity use also reduces their share of the emissions of the generation fleet that’s providing electricity to the grid during the hours of reduction.

WattCarbon’s marketplace is a novel concept that pushes the boundaries of how carbon offsets are accounted for today. Its clean-energy credits could potentially be converted into carbon-offset equivalents for voluntary carbon accounting or adapted to future iterations of accounting for renewable energy certificates.

It’s unclear whether the entities that operate the world’s existing carbon-offset markets, both the compliance-based markets and the voluntary ones, will embrace WattCarbon’s credits. In the compliance markets, the methodologies for measuring just how clean or dirty a kilowatt-hour of electricity consumption is at a particular place and time on the power grid are still being developed by government and private-sector consortiums.

But unlike in the opaque and increasingly suspect universe of voluntary carbon offsets traded today, anyone who wants to know how WattCarbon and its partners are calculating their carbon-cutting impact can delve into the data and methodology behind the marketplace, he said.

“We call this the world’s first open-source decarbonization program,” Young said. In a world of sketchy carbon offsets, ​“we want to provide the good-faith path.” 

The data science behind calculating carbon impacts at the building level

Young has spent much of the past decade working on technology to bring clarity and transparency to the tricky data and methodological challenges associated with measuring the real-world impacts of changing energy use.

As CTO at Recurve (formerly OpenEE) from 2019 to 2021, Young helped lead the development of the first open-source software to use smart-meter data to calculate ​“avoided energy use,” or energy saved through efficiency and electrification investments, specific to a place and time. That measurement-and-verification methodology has become the basis of ​“pay-for-performance” efficiency programs such as California’s Market Access program and similar ones in Massachusetts, New York and Oregon.

Young founded WattCarbon in August 2021 to put this experience to work measuring the hourly carbon-emissions footprint of buildings — data it now makes available for individual addresses across the country.

Buildings’ emissions can be reduced by investing in energy efficiency, shifting the time of power use, replacing fossil-fueled heating with electric heat pumps, putting solar panels on roofs or nearby properties, and buying clean power from another source, to name some key options.

Today, companies that have made carbon-cutting pledges can make progress toward them by reducing carbon emissions at the buildings they own, but they have no such opportunities at buildings they don’t own. Young sees this as an artificial barrier to companies making investments in some of the most effective technologies for cutting emissions.

Shifting buildings from fossil fuels to (cleaner) electricity

Building-electrification projects will be one type of carbon offset available on WattCarbon’s market, with the aim of eliminating fossil fuels from buildings, especially for heating. These are the kinds of projects that Colorado-based home-electrification startup Elephant Energy is planning to offer up to offset buyers.

“WattCarbon is the first one who’s approached us about how could we collectively monetize the decarbonization benefits of the assets” Elephant Energy is deploying in homes, said D.R. Richardson, Elephant’s CEO. It’s an attractive concept, but it comes with a lot of complications.

“It’s really hard to measure the additionality of something like a heat-pump carbon credit,” he said, mainly because of the uncertainty of the variables involved. How much gas would a home’s furnace have burned over the next decade if it hadn’t been replaced with a heat pump? How should the carbon-intensity of the electricity powering the heat pump that replaces it be measured?

But ​“at the end of the day, I am a believer in ​‘Don’t let the perfect be the enemy of the good,’” Richardson said. Corporate investments in the carbon-cutting potential of Elephant Energy’s portfolio of future home-electrification projects could allow the company to reduce the cost of switching out furnaces for heat pumps and make it more affordable for a wider group of homeowners, he noted. ​“We’ll use every tool we have to drive that price down, to grow our business, and more importantly, to enable a clean energy transition.”

Similar opportunities and complications apply to another of WattCarbon’s offset categories: demand response. Today, the value of reducing energy use during certain hours of the day is based on shifting demand away from times when grid power is scarce and costly. In some parts of the country, those correspond to times when more fossil-fueled power plants are running than usual — but that’s not always the case.

No U.S. grid operator or utility has yet put a price on the carbon-intensity of the power exchanged over the wires they manage, said Doug Middleton, head of business development at demand-response aggregator Leap. But there’s a growing body of analysis that indicates that the ​“demand flexibility” provided by companies like Leap can shift a significant amount of load away from the grid’s most carbon-intensive hours of operation. Those are the kinds of offset opportunities that Leap will be offering on WattCarbon’s marketplace.

WattCarbon is taking the initiative to create its own methodology to calculate these values ​“rather than waiting for some mandate from the government,” he said. ​“McGee, with his experience with OpenEE and Recurve, can provide that reliability and quality.”

Capturing the carbon value of clean energy on dirtier grids

A third WattCarbon offset category will give companies a way to maximize the carbon impact of their renewable-energy investments by targeting projects in parts of the country where the grid is dirtier than in others.

Adding more solar and wind to places where fossil fuels provide most of the power can have a greater carbon-reduction impact than adding it to places where clean energy is already plentiful. A new solar farm in California or a new wind farm in West Texas is adding more carbon-free energy to grids already awash in it during hours when they produce the most energy. In fact, these renewables are increasingly being forced to curtail their output when there’s too much of it for the grid to use.

Today’s structures for valuing renewable energy certificates don’t differentiate between temporal and locational differences in a clean energy project’s carbon impacts, however. WattCarbon will incorporate these values into the credits that investors purchase to enable the projects to be built.

A handful of other clean energy developers are offering similar carbon credits. Clearloop, a subsidiary of Tennessee-based rural-solar developer Silicon Ranch, is planning solar projects that will take investments from companies and individuals in exchange for the carbon-emissions reductions tied to siting its projects in Southeastern U.S. markets that have relatively high carbon emissions.

Corporate purchases of clean energy in the U.S. now account for a greater share of clean-energy investment than purchases made by utilities to meet state renewable-energy mandates. Rick Hunter, chief strategist of solar developer Pivot Energy, thinks that accounting for the carbon-reduction impact of where a project is built could direct a lot more of that corporate investment into community solar projects of the type his company develops.

“If you care about carbon offsets, let’s go build a project on your behalf in West Virginia,” where coal generates the majority of grid power, he said. ​“Who thought you could make a project pencil [out economically] in West Virginia? Well, carbon makes it possible.”

Lining up the buyers 

Who might buy the carbon-offset values of these kinds of distributed clean energy projects? Young declined to disclose any prospective customers but said that WattCarbon and its partners will be selective in which companies they’ll be working with — ​“no coal companies,” for example.

Likely buyers include companies with 24/7 clean-energy goals and ​“impact-oriented companies” suspicious of the carbon offsets now available, he said. Smaller companies that can’t afford to invest in large-scale clean energy projects are also possible customers.

Each seller in WattCarbon’s market will set its own price for a ton of carbon offsets in a particular project. ​“They know better than we do how much they need to get the project done,” Young said.

It’s hard to guess what those prices might be. They’re likely to be higher than the going rate for the renewable-energy and forest-protection credits that make up most of the voluntary carbon market, which are selling for under $15 per metric ton. But they’ll almost certainly be lower than the price of nascent atmospheric carbon-removal technologies, which now cost hundreds of dollars per ton, he said.

“It turns out that doing this the right way means that it’s a bit more expensive than the typical offset purchase,” he said. ​“So companies looking for greenwashing opportunities kind of hate us.”

WattCarbon hasn’t yet worked with any of the registries that oversee the world’s voluntary carbon-offset markets, Young noted. Prospective buyers of WattCarbon’s offsets ​“may or may not” choose to work with these registries, he said, given that ​“they’re very opaque” about their data collection and verification processes — a reason for much of the criticism of voluntary carbon markets.

Young insisted that WattCarbon’s approach is much more transparent than these existing processes. ​“As the buyer, you’re getting the performance data from your dashboard in real time from the projects you purchased offsets from,” he said. ​“There’s no question about the claim — you literally have the data there supporting it.”

The confusion over offsets, renewable energy certificates and corporate carbon accounting

WattCarbon’s approach to number-crunching isn’t unique. WattTime, REsurety, Cleartrace, FlexiDAO, Singularity and others are collecting and analyzing data to gain more insight into the temporal and locational value of different carbon-reduction investments.

Even so, it’s unclear how corporate buyers of carbon offsets might interact with the opportunities that WattCarbon will be making available. This uncertainty underscores a broader debate among government agencies and private-sector investors and financial institutions about how to structure carbon-offset and renewable-energy crediting structures in a way that both guards against fraud and abuse and allows companies to invest in reducing their carbon impacts.

“There are customers who increasingly want to procure clean energy at the most carbon-intensive places and times,” said Doug Miller, deputy director of market and policy innovation for the Clean Energy Buyers Association, which represents companies with clean energy goals including Amazon, Disney, Google, Meta, Microsoft, Target and Walmart.

At the same time, ​“we have to make some underlying changes in the market system that make it easier for WattCarbon to sell its services,” he said. 

One big change underway involves the Greenhouse Gas Protocol, an international consensus standard for carbon-emissions accounting. The GHG Protocol is in the midst of considering revisions to how it accounts for the carbon impacts of clean energy generation, energy storage, green-hydrogen production and other decarbonization technologies. These revisions could include a major shift from annual to hourly accounting of the impacts of investments in these technologies.

“What do we mean by decarbonization impact? How do you verify?” Miller asked. ​“People too often talk about this in the clouds. We’re talking about where the rubber meets the road — something that a customer can sign and purchase.”

Young knows there’s still work to do before WattCarbon’s data and methodology can be aligned with the approaches being developed for use in global offset markets. The company is working with startups such as Singularity and nonprofit groups like EnergyTag to incorporate the latest developments in carbon measurement. Young is a founding member of the Carbon Data Specification Consortium, a project of the Linux Foundation’s LF Energy initiative that’s working on open and transparent methods to calculate carbon-emission data points.

All of this work is necessary to win the confidence of companies, project developers, regulators and other stakeholders and assure them that investments in WattCarbon’s distributed carbon-reduction opportunities are a viable alternative to the problematic carbon-offset structures that exist today. WattCarbon’s clean-energy-credit mechanism is also designed to evolve alongside the rules and standards for how corporate investments into clean energy are accounted for, Young said.

But the need for investment to combat climate change is too pressing to wait for the perfect carbon-accounting system to emerge before moving ahead, he argues. WattCarbon and its partners want to ​“provide a compelling pathway to meaningful action,” he said. ​“That’s why we’re doing all this.”