Key Takeaways
Scope 2 covers indirect emissions from purchased electricity, heat, steam and cooling. Under the GHG Protocol, you must report two figures: location-based and market-based.
Location-based uses the grid average factor (UK 2025: 0.19553 kg CO₂e/kWh). Market-based uses your contractual instrument. It can reach zero. Location-based cannot.
REGOs are the UK certificate for market-based Scope 2. To apply a zero emission factor, they must be retired, not just purchased, within the same compliance year.
Unbundled REGOs are GHG Protocol compliant but carry additionality risk. PPAs on new-build projects are the stronger claim for CDP and investor scrutiny.
SECR requires dual Scope 2 disclosure for qualifying UK organisations. ESOS Phase 4 compliance deadline is 5 December 2027.
Most companies with a green electricity tariff assume their market-based Scope 2 emissions are zero. Many are wrong. The tariff may not come with retired Guarantees of Origin. The certificates may not meet the GHG Protocol's Scope 2 Quality Criteria. The reporting may disclose only one figure when two are required. With the GHG Protocol undergoing its first major revision in a decade and investor scrutiny of renewable energy claims intensifying, the gap between what companies think they've done and what the standard actually requires has never carried more risk.
Over 300,000 companies purchase more than 300 million renewable energy certificates annually — yet the vast majority have never stress-tested their instruments against the quality criteria that CDP, SBTi, and SECR auditors are now applying.
This article covers:
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How location-based and market-based Scope 2 accounting work, with real calculations using the 2025 DESNZ factors
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How RECs, REGOs, and I-RECs function and what you must do to apply a zero emission factor
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When a PPA makes more sense than a certificate-backed tariff
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How to get to zero market-based Scope 2 in five steps
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How to respond to additionality scrutiny from investors and CDP
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What SECR and ESOS require from UK organisations specifically
What Are Scope 2 Emissions?
Scope 2 emissions are the indirect greenhouse gas emissions produced by the generation of energy that an organisation purchases and consumes. The scope 2 emissions definition under the GHG Protocol Corporate Standard covers purchased electricity, heat, steam, and cooling — energy that is consumed on-site but generated elsewhere.
For most UK businesses, electricity is the dominant source. Common scope 2 emissions examples include:
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Office and warehouse electricity consumption
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Data centre power draw (whether owned or co-located)
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On-site EV charging infrastructure
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Purchased district heating or cooling
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Steam bought from a third-party supplier for industrial processes
Why it matters: Scope 2 is typically the largest controllable emissions category for service-sector organisations, often representing 40-70% of their total carbon footprint before Scope 3 is considered. It is also the category where procurement decisions have the most direct and measurable impact on reported emissions.
Scope 2 GHG emissions sit within the GHG Protocol's three-scope framework alongside Scope 1 (direct emissions from owned sources) and Scope 3 (all other indirect emissions in the value chain). For a full treatment of all three scopes, see Thallo's Scope 1, 2 and 3 emissions explained guide. Unlike Scope 3, Scope 2 is mandatory under SECR for qualifying UK organisations and is the primary lever for achieving near-term net-zero targets.
Location-Based vs Market-Based: What the Difference Actually Means
The GHG Protocol Scope 2 Guidance requires organisations operating in markets with contractual instruments to report Scope 2 emissions using two methods simultaneously. This is called dual reporting, and both figures must appear in CDP disclosures, SECR filings, and SBTi target tracking.
The Location-Based Method
The location-based method calculates Scope 2 emissions using the average grid emission factor for the region where electricity is consumed. In the UK, the relevant factor is published annually by the Department for Energy Security and Net Zero (DESNZ).
For 2025, the UK electricity generation factor is 0.17700 kg CO₂e/kWh — down from 0.20705 kg CO₂e/kWh in 2024, a reduction of approximately 15% driven by lower natural gas use in power generation and increased net electricity imports. The combined factor including transmission and distribution (T&D) losses is 0.19553 kg CO₂e/kWh.
Location-based emissions cannot reach zero regardless of what energy contracts a company holds. They reflect the physical reality of the grid.
The Market-Based Method
The market-based method uses the emission factor derived from a company's contractual instruments. These include RECs, REGOs, PPAs, green tariffs, and supplier-specific rates.
The GHG Protocol defines a hierarchy for selecting the appropriate factor:
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Supplier-specific emission factor (from a direct contract with a generator)
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Residual mix factor (the grid's emissions after all contractual claims are removed)
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Grid average factor (used only where no contractual data exists)
When a company retires certificates covering 100% of its consumption, the contractual emission factor is zero. Market-based Scope 2 can then be reported as zero. The location-based figure remains unchanged.
Worked Example: 500,000 kWh UK Office (2025)
Location-based: 500,000 kWh x 0.19553 kg CO₂e/kWh = 97.77 tCO₂e
Market-based (no instruments): 500,000 kWh x residual mix factor (approximately 0.19553 kg CO₂e/kWh where no supplier-specific data exists) = ~97.77 tCO₂e
Market-based (with retired REGOs covering 100% of consumption): 500,000 kWh x 0 kg CO₂e/kWh = 0 tCO₂e
The divergence between the two figures is what demonstrates the value of renewable procurement. Both must be disclosed.
| Method | Data source | Can reach zero? | Required by GHG Protocol? |
|---|---|---|---|
| Location-based | DESNZ grid average factor | No | Yes — always |
| Market-based | Contractual instrument factor | Yes, if instruments meet quality criteria | Yes — where instruments exist |
| Market-based (no instruments) | Residual mix or grid average | No | Yes — report alongside location-based |
SBTi note: The Science Based Targets initiative accepts market-based accounting for Scope 2 target tracking, but requires that instruments meet quality criteria including annual matching and same-market sourcing.
RECs, REGOs and I-RECs: How Energy Attribute Certificates Work
Energy attribute certificates (EACs) are the instruments that make market-based Scope 2 accounting work. Each certificate represents 1 MWh of electricity generated from a renewable source, and carries with it the environmental attributes of that generation. When a company buys and retires an EAC, it transfers those attributes to its own consumption record.
The certificate type depends on geography:
| Certificate | Market | Issuing body | GHG Protocol recognised? | Notes |
|---|---|---|---|---|
| REGO (Renewable Energy Guarantee of Origin) | UK | Ofgem | Yes | 1 REGO per MWh of eligible UK renewable generation |
| REC (Renewable Energy Certificate) | North America | NERC / state bodies | Yes | Used by US and Canadian operations |
| GO (Guarantee of Origin) | EU | National issuing bodies | Yes | European equivalent of REGOs |
| I-REC (International REC) | Global (non-EU/US/UK) | I-REC Standard | Yes | Used for operations in markets without domestic schemes |
For UK operations, REGOs are the primary instrument. They are issued by Ofgem's Renewables and CHP Register and can be purchased directly from generators, through brokers, or via a REGO-backed green tariff from an energy supplier.
How Retirement Works
Holding a certificate is not sufficient to claim a zero market-based emission factor. Under the GHG Protocol Scope 2 Quality Criteria, a company must retire the certificate. Retirement removes it permanently from circulation so it cannot be claimed by another party.
A UK company consuming 1 GWh (1,000 MWh) of electricity must retire 1,000 REGOs to apply a zero emission factor under the market-based method. Retirement must occur within the same compliance year as the consumption it covers.
The GHG Protocol also requires that the instrument meets three further criteria:
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Same market: The certificate must originate from the same country or grid area as the consumption
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Same period: Annual matching is the minimum standard (the certificate vintage must match the reporting year)
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No double-counting: The attribute cannot have been claimed by any other party, including the generator or the grid operator
The Green Tariff Question
Many UK businesses pay a premium for a "100% renewable" electricity tariff and assume this satisfies their market-based Scope 2 obligation. It does — but only if the supplier retires REGOs on the customer's behalf and provides a supplier-specific emission factor of zero. Ask your supplier directly: are REGOs being retired in my name, and will you provide documentation for my GHG inventory? If the answer is unclear, the safe assumption is that your market-based figure is not zero.
PPAs Explained: When They Make Sense vs Certificate-Backed Tariffs
A Power Purchase Agreement (PPA) is a direct, long-term contract between a corporate buyer and a renewable energy generator. Unlike a green tariff or spot-market REGO purchase, a PPA bundles the electricity with the certificate — meaning the company buys both the energy and its environmental attributes directly from the source.
PPAs vs Certificate-Backed Tariffs
| PPA | REGO-backed green tariff | Spot REGOs | |
|---|---|---|---|
| Contract length | 10-15 years typical | Annual | Spot / annual |
| Energy price certainty | Yes (fixed or indexed) | No | No |
| Additionality potential | High (especially on new-build projects) | Low | Low |
| GHG Protocol compliant | Yes | Yes (if REGOs retired) | Yes (if retired) |
| Minimum volume | Typically >5 GWh/year | Any size | Any size |
The GHG Protocol Scope 2 Guidance is explicit on what drives real-world impact: "market analysis indicates that the effect of voluntary demand on new renewable energy project development is based on the presence of long-term contracts for RECs and energy from projects as yet unbuilt." A PPA signed before a project reaches financial close is the mechanism through which corporate procurement actually finances new renewable capacity.
When to Use Each
PPAs make sense when your organisation consumes more than 5 GWh per year, has appetite for a 10-15 year commitment, and wants the strongest possible additionality claim for CDP and investor reporting.
REGO-backed tariffs or spot REGOs are appropriate for smaller consumption volumes, organisations earlier in their sustainability journey, or as a bridge while building towards a PPA.
European corporate renewable procurement grew by over 52% in 2023 to reach 20 GW, according to the EU Sustainable Energy Week. The direction of travel is clear — the question is whether your instruments will hold up as scrutiny increases.
How to Reduce Scope 2 Emissions: Getting to Zero Market-Based in Practice
Achieving zero market-based Scope 2 is a process, not a single transaction. These five steps apply to any UK organisation working towards a compliant zero figure.
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Establish your baseline. Calculate both location-based and market-based figures for your full estate using the 2025 DESNZ conversion factors (generation factor: 0.17700 kg CO₂e/kWh; combined with T&D: 0.19553 kg CO₂e/kWh). Use Thallo's Scope 2 emissions calculator to model your figures across multiple sites and methods.
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Audit your current instruments. Review every electricity contract across your estate. Does your supplier retire REGOs on your behalf? Do you have a supplier-specific emission factor of zero in writing? If not, your market-based figure is not zero — it defaults to the residual mix or grid average.
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Procure certificates to cover uncovered consumption. For UK operations, source REGOs via a REGO-backed tariff, a broker, or directly from a generator. For international operations, use I-RECs in markets without domestic certificate schemes. Volume must match consumption MWh for MWh.
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Retire and document. Retirement must occur within the same compliance year as the consumption it covers. Retain retirement certificates, registry confirmations, and supplier documentation as audit evidence. This is what auditors and CDP reviewers will ask for.
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Report both figures with full methodology disclosure. The GHG Protocol requires disclosure of the instrument categories used (e.g. "unbundled REGOs, UK vintage 2025, retired via Ofgem registry"). Transparency here is not optional — it is what separates a defensible disclosure from a greenwashing exposure.
Critical timing rule: A REGO retired in January 2026 against 2025 consumption is valid. A REGO retired in January 2026 against 2026 consumption is not. Match vintage to reporting year, not purchase date.
The Additionality Debate: How to Respond to Scrutiny
The most common challenge sustainability teams now face from investors, CDP reviewers, and the press is not whether their certificates are GHG Protocol compliant — it is whether those certificates actually drove any new renewable energy into existence.
The Criticism
The GHG Protocol's own Scope 2 Guidance acknowledges on page 90 that "individual voluntary purchases and consumer programs may or may not result in changes in low-carbon supply." The concern is specific: when a company buys unbundled spot REGOs from a wind farm that was built years ago with government subsidies, the purchase reshuffles existing renewable attributes. It does not finance new capacity.
According to analysis cited in the GHG Protocol revision discussions, over 300,000 companies purchase more than 300 million RECs annually — but fewer than 1% procure them via long-term contracts on new-build projects. That 1% drives roughly half the market's total volume and delivers most of its real-world climate impact.
As one analyst at Lazard Asset Management noted via S&P Global Sustainable1: "companies that use unbundled RECs to measure Scope 2 emissions could end up being very exposed" if the rules change.
The Credible Response
Unbundled REGOs are GHG Protocol compliant. They are the correct instrument for market-based Scope 2 accounting. The criticism is not that they are fraudulent — it is that they do not demonstrate additionality, which is an increasingly important distinction for high-scrutiny reporters.
The credible response combines three things:
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Transparency: Disclose instrument type, vintage, geography, and issuing registry in your GHG inventory and CDP response
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Acknowledgement: Do not claim that REGO purchases "funded" new renewable energy unless they were procured via a long-term contract on an unbuilt project
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A roadmap: Describe your path towards higher-quality procurement — whether that is a PPA, a long-term REGO contract with a specific generator, or participation in a new-build project
The GHG Protocol revision currently in progress is expected to create clearer recognition for instruments that demonstrably drive additionality. Companies that have already moved up the procurement quality ladder will be ahead of that shift.
SECR and ESOS: UK Reporting Requirements for Scope 2 Energy
Two mandatory UK frameworks govern how large organisations report energy use and Scope 2 emissions: Streamlined Energy and Carbon Reporting (SECR) and the Energy Savings Opportunity Scheme (ESOS).
SECR: Who Must Report and What
SECR has been mandatory since 2019 under the Companies Act. It requires qualifying organisations to disclose Scope 1 and Scope 2 emissions, total energy consumption in kWh, an intensity ratio, and a narrative on energy efficiency actions — all filed in the Directors' Report at Companies House.
| Organisation type | Threshold |
|---|---|
| UK quoted companies | All sizes — no threshold |
| Large unquoted companies and LLPs | Must meet 2 of 3: 250+ employees / £36m+ turnover / £18m+ balance sheet |
| Low energy users | De minimis exemption if consumption is 40 MWh or less — but must be declared |
For 2025/26 SECR reporting, use the 2025 DESNZ conversion factors published in June 2025. Note that annual factor updates can change your reported Scope 2 emissions even when consumption is flat — a 15% reduction in the UK electricity factor between 2024 and 2025 means location-based figures will be materially lower year-on-year for the same consumption.
UK Sustainability Reporting Standards (UK SRS), aligned with ISSB IFRS S1 and IFRS S2, are expected to be available for voluntary use from 2026 and may become mandatory for certain entities thereafter.
ESOS Phase 4: Key Dates
ESOS is a mandatory energy assessment scheme for qualifying UK organisations (250+ employees or £44m+ turnover). It operates on a four-year cycle with a "one in, all in" group principle.
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Qualification date: 31 December 2026
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Compliance deadline: 5 December 2027
Phase 3 non-compliance has already resulted in the Environment Agency issuing over £160,000 in fines. Organisations that have not yet submitted their Phase 3 action plan should act immediately. Phase 4 preparation — including establishing robust Scope 2 measurement — should begin now.
Next Steps: Procure RECs That Hold Up to Scrutiny
Zero market-based Scope 2 is achievable — but only with the right instruments, correctly retired, with full methodology disclosure. A green tariff alone is not enough. Spot REGOs without retirement documentation are not enough. And as the GHG Protocol revision progresses, the bar for what constitutes a credible claim is rising.
The companies that will be ahead of that shift are those that have already moved from passive certificate purchasing to active, documented, quality-assured procurement — and ideally towards long-term contracts that can withstand an additionality challenge.
Thallo's REC procurement service handles sourcing, retirement, and reporting documentation for UK and international operations — giving sustainability teams the audit trail they need for CDP, SECR, and investor disclosure. Get in touch to learn about the platform and discuss your Scope 2 procurement strategy.
Frequently Asked Questions
What is scope 2?
Scope 2 emissions are indirect greenhouse gas emissions from the generation of purchased energy — primarily electricity, but also heat, steam, and cooling. They are produced off-site by a third party and consumed by your organisation. Under the GHG Protocol, Scope 2 must be reported using both location-based and market-based methods.
What is the difference between location-based and market-based scope 2 emissions?
Location-based scope 2 uses the average grid emission factor for your region. In the UK, the DESNZ factor for 2025 is 0.19553 kg CO₂e/kWh (generation plus T&D). Market-based scope 2 uses the emission factor from your contractual instruments, such as REGOs or PPAs. If you retire certificates covering 100% of consumption, your market-based figure can be zero. Your location-based figure cannot.
What are renewable energy certificates in the UK?
In the UK, renewable energy certificates are called REGOs (Renewable Energy Guarantees of Origin). They are issued by Ofgem's Renewables and CHP Register at a rate of one REGO per MWh of eligible renewable generation. To apply a zero market-based Scope 2 emission factor, REGOs must be retired — not just purchased — in the same reporting year as the consumption they cover.
How do I reduce scope 2 emissions to zero?
To reach zero market-based Scope 2: calculate your baseline using the 2025 DESNZ conversion factors, audit whether your supplier retires REGOs on your behalf, procure certificates to cover any uncovered consumption (REGOs for UK operations, I-RECs internationally), retire them within the compliance year, and disclose your methodology and instrument types in your GHG inventory. Both the location-based and market-based figures must still be reported.
What are the SECR reporting requirements for scope 2 emissions?
SECR requires qualifying UK organisations to disclose Scope 2 emissions (purchased electricity in kWh and tCO₂e) in their Directors' Report at Companies House. It applies to all quoted companies and large unquoted companies or LLPs meeting 2 of 3 thresholds: 250+ employees, £36m+ turnover, or £18m+ balance sheet. The 2025 DESNZ conversion factors apply for 2025/26 reporting. Note that annual factor updates can change your reported figures even when consumption is flat.
