True cost accounting in wind energy and coal-fired energy generation in the Dutch energy market
Master Thesis
Name: Peter Bosma Student number: 2952769
Course: Master’s Thesis Accountancy University: University of Groningen Supervisor: Gusc, J.S.
Place: Groningen
Adress: Billitonstraat 8a, Groningen Phone number: +31683376654
Date: 22-06-2020
Number of words: 13198 (exclusive of Tables, Figures, Appendices and References)
ABSTRACT
This research is about how to apply the concept of True Cost Accounting (TCA) in the Dutch energy market. TCA attempts to generate a true cost price, in which all direct and indirect, internal and external costs will be integrated. The idea here is to make the concept of sustainability more operational in practice. The Dutch energy market is one of the least sustainable energy markets in Europe. Current literature stated due to the excluding of
externalities sustainable decision making may be distorted. This research therefore attempted to find out how sustainable wind energy- and coal energy generation really is. This would enable people to make the sustainable choices and it provide insight in how to integrate the true cost of energy generation into the cost price. The findings are that wind energy generation is indeed more sustainable than coal energy generation. Moreover, the findings suggest that Dutch energy
companies do not take full responsibility yet to include externalities into the cost price. They pass that responsibility onwards to the government, which then need to deal with external costs of the energy generation via taxes and subsidies. The cost prices in the Netherlands therefore do not fully reflect the concept of TCA, and thus sustainability. Taken all together, this research provides insight in how sustainable energy generation in the Netherlands really is.
List of Abbreviations
TCA = True Cost Accounting TBL = Triple Bottom Line LCA = Life Cycle Analysis
VRE = Variable Renewable Energy GHG = Greenhouse gas
CCS = Carbon Capture and Storage LCOE = Levelized Cost of Energy EB = Energiebelasting
ODE = opslag duurzame energie PPA = Power Purchase Agreement
Table of content
1. INTRODUCTION ...5
2. THEORETICAL BACKGROUND ...7
2.1. Definition sustainability ...7
2.2. Steps and elements in TCA ...9
2.3. Adoption of TCA ...10
2.4. Labeling of energy ... 11
2.5. TCA in energy generation ... 12
2.6. Conceptual model ... 18
3. METHODOLOGY ... 18
3.1. Research design ... 18
3.2. Case study ... 19
3.3. Methodology TCA ... 20
3.4. Data ... 20
3.5. Data analysis plan ... 21
3.6. Case companies ... 22
4. RESULTS ... 23
4.1. Defining the cost objective ... 23
4.2. Defining the scope of the analysis ... 25
4.3. Measurement and monetizing of the relevant costs ...29
4.4. True cost price of coal- and wind energy generation ... 34
4.5. Sustainability in current cost prices of energy generation ...35
5. DISCUSSION ...37
5.1. Interpretation of the results ... 37
5.2. Limitations ...40
5.3. Recommendations ... 41
5.4. New understanding ... 41
6. CONCLUSION ... 43
7. REFERENCES... 44
List of Tables 1. Table 1: Stakeholder analysis in the life cycle of the energy generation process of coal- and wind energy ... 13
2. Table 2: Quotes of respondent on stakeholder identification of wind energy generation ... 23
3. Table 3: Quotes of respondent on stakeholder identification of wind energy generation ... 24
4. Table 4: Quotes of respondent on the relevant of costs of energy generation. ...25 5. Table 5: Description of the costs in the cost price of energy generation. ...27 6. Table 6: The measurement and monetizing of wind- and coal energy generation ...….29 7. Table 7: The true cost prices of onshore energy generation, offshore energy generation,
hard coal energy generation and coal energy generation with CCS technology after
combustion in eurocents per kwh generated. ... 34 8. Table 8: Quotes of the respondent about to what degree the energy market did include
all externalities in the cost prices ...36
List of Tables
1. Figure 1: Conceptual Model ... 18
1. Introduction
For a year now, I have been working in the Dutch energy sector for Vandebron and what I have
experienced is that Dutch energy companies are not taking any responsibility regarding climate change.
The Dutch energy market is namely the least sustainable energy market of whole Europe, (NOS, 2020).
Energy markets have an important role towards a low carbon energy transition (Wu et al, 2018).
Therefore, it is important for energy markets to become more sustainable in order to tackle climate change. Certificates have been introduced in the European energy markets to reduce the information asymmetry, since consumers cannot credibly distinguish between renewable and non-renewable energy (Hulshof, et al, 2019). The certification has become increasingly important as a trade mechanism since.
The goal was to reduce the information asymmetry to help consumer make better sustainable decisions (Hulshof et al, 2019). However, the sustainable performance of the market remains poor. It has not led to a massive increase in the amount of sustainable energy (Hulshof et al, 2019). The labelling of energy was also important. Wind- and solar energy are regarded as being sustainable, while coal energy for example is regarded as being unsustainable. Therefore, people who want to choose responsible preferred the wind – and solar energy production. More and more stakeholders find it important that companies become more sustainable, since the climate change effects become clearer (GfK, 2018). The Netherlands is targeting towards more wind energy and solar energy and less coal energy, since the assumption is that wind and solar energy should contribute to the goal of the Netherlands to become more sustainable. But how sustainable is the energy production in the Netherlands in reality?
Decisions within companies are primarily made on the basis of the financial performance and social and environmental aspects are left out, due to an classical accounting thinking in which financial performance was the most important, due to a weak measurability, due to a lack of consensus for evaluating those aspects because of the complexity of the key ecological and social processes (Bebbington & Larrinaga, 2014; Mancuso, 2009; Porter & Kramer, 2011). Also,
companies find it difficult to define sustainability. There is no standard definition that all
organizations can use to monitor the steps they are taking towards sustainability (Pojasek, 2012;
Milne & Gray, 2013). In the context of sustainability, companies have become dangerously confused with advancing a sustainable world (Milne & Gray, 2013). In making sense of
sustainability, primarily through an incomplete notion of sustainability reporting, business over the years have limited their ideas about sustainability (Milne and Gray, 2013).
The use of TBL, in which a company should consider the three pillars of sustainability: people, the profit and the planet, as an analogue of corporate sustainability is a myopic and inwardly focused concern largely lacking ecological understanding (Milne & Gray, 2013). Malan et al (2014) Proposed a six-capital model in which sustainability should be involved in all the 6 capitals. Financial, manufactured, intellectual, human, social and relationship and natural are the six capitals in which companies should integrate sustainability. This will lead to a more nuanced model for integrating sustainability in accounting than the TBL model does (Malan et al, 2014).
Environmental accounting so far is still a limited notion and therefore the parameters of what constitutes environmental accounting should be broadened (Russel et al, 2017). For the Dutch energy market, the same applies. Sustainability within the Dutch energy market is determined by whether fossil fuels are being used for the energy generation (Freedenthal, 2013). Sustainability,
therefore, must be taken more broadly in the sense that all externalities of all processes in the energy production will be taken into consideration as well. The concept of green then may after all not be so sustainable at all, due to the current incomplete notion of sustainability. When consider all externalities, it become easier to determine sustainability in the energy production.
Accounting information will be completer and relevant and the usefulness of the accounting information might increase (Mahapatra et al, 2012).
Until now it is the case that many external effects of the energy generation, as co2 emission or health costs, are not yet or barely included in the cost price of products and services. To account for externalities in the cost prices is more effective than environmental regulation, but
nonetheless many externalities are still not taken account for in practice (Gies, 2017; Weidu, 2018). Because those social and environmental externalities are often not considered in decision making, they can distort the decision-making process in the Dutch energy market (Epstein, et al, 2011; Mattmann et al, 2016). True cost accounting (TCA) might be a solution for this problem (Epstein et al, 2011). It helps give insight in what the true cost price of energy generation
methods is, in which society and environment aspects are included (Epstein et al, 2011). TCA, in which all externalities are taken into consideration, can help estimating the true costs for a company (Epstein et al, 2011). TCA is a method of accounting to identify all the cost, both internal and external and both indirect and indirect, which are associated with products are services (D’Onza et al, 2016). A full picture of the cost price will be generated, in which all the externalities are included (D’Onza, et al, 2016). TCA should help improve the quality of the financial information, since more relevant externalities will be included. More complete and relevant information will be generated. This may lead to better decision making in the energy market (Mahapatra et al, 2012).
Because the energy market plays an important role in becoming more sustainable as a country (Wu, et al, 2018), it is relevant to see how the Dutch energy market may integrate social and environmental aspects in their cost price more effectively. This will enable people to make better sustainable choices (Hulshof et al, 2019). This research will be comparing the assessment of externalities in coal energy and in wind energy. For energy generation this may be quite relevant, because many social and environmental effects exist, which are difficult to measure and
monetize. Therefore, it is hard to integrate the social and environmental externalities in the cost price. Since wind energy is regarded as being sustainable and coal energy to be not sustainable, it interesting to see what role TCA can play in determining sustainability in the Dutch energy market. For the non-renewable energy the Coal energy will be discussed, because it has huge environmental costs. These environmental costs are difficult to accurately integrate in the cost price in practice. The Dutch government is also planning to slowly reduce the amount of coal energy production towards 2030 (Ngô & Natowit, 2016; CPB, 2019). For sustainable energy two types of sustainable energy generation methods are prioritized in the Dutch energy sector, namely wind energy and solar energy. This paper focuses on wind energy, because the Netherlands is primarily focused on wind energy. In 2018 wind energy produced more than three times more energy than solar energy in the Netherlands (CBS, 2019), and for 2030 the Dutch government is planning to produce the majority of all the Dutch energy out of wind energy (Rijksoverheid, 2018). The result of this research will be a much wider and more complete picture of sustainable
performance that will give insight in whether renewable energy is really sustainable after all and whether non-renewable energy is as unsustainable as is claimed.
Literature about TCA so far focusses on the challenge to apply TCA in practice by making the externalities measurable and to create a consensus about evaluating the external effects
(Mancuso, 2009; Jasinski et al, 2015). Literature about TCA in the energy production so far is limited and it primarily focuses on the energy generation abroad. A research about TCA on energy generation in the Netherlands therefore is missing. Moreover, since externalities are quite region specific, a research about the TCA in coal energy and wind energy generation in the Netherlands is therefore relevant (Mahapatra, et al, 2012). A discussion in the literature about sustainability is going on about the measurement of environmental performance. Russel et al (2017) proposed to broaden the parameters of what constitutes environmental accounting. They want to break open the very much limited notion of environmental accounting by promote and generate a wider, wilder picture that is fully representative of the political and moral concerns at play in “accounts of nature” (Russel et al, 2017). A wider perspective should include more than just the information throughput model, in which environmental accounting focuses on economic entities and their inputs and outputs (Russel et al, 2017). Environmental accounting therefore must break free of the perspectives of accounting, economic and organizational frameworks (Gray et al, 2009).
Research Question: Is green energy in the Dutch energy market as sustainable as it is claimed to be?
Sub-question: To what degree are the current cost prices of coal- and wind energy generation in the Netherlands sustainable?
2. Theoretical Background
In this section first there will be a short definition about what constitutes sustainability and how it is applied in the energy market. Secondly, the role TCA could play in the energy market will be discussed. Thirdly, the labeling of the energy as whether being sustainable will be discussed.
Finally, different theories will be discussed and interlinked relations will be explained in order to build a conceptual model.
2.1. Definition Sustainability
In literature, over 300 definitions can be found for sustainability (Ehrenfeld, 2008). But there is not just one standard definition of sustainability. It shows that there is a lot of discussion going on in the world on what constitutes sustainability. According to Brundtland et al (1987)
Sustainability can be regarded as the ability to meet the needs of the present without
compromising the ability of future generations to meet their own needs. Unerman et al (2007) stated that sustainability accounting and accountability may become a powerful tool in
management, planning, controlling and accountability for the social and environmental impacts of an organization. Companies find it difficult to add sustainability to their operations, because people do not completely understand the concept of sustainability (Russell, et al, 2017).
Therefore, companies are looking for frameworks to make the concept of sustainability
operational (Spangenberg, 2011). However, the development of sustainability accounting practice is not straightforward (Bebbington & Larrinaga, 2014). Some researches see sustainability as long term shareholder value creation, where social and environmental issues are considered to be risks and opportunities (RobescoSAM, 2015; Ihlen, 2015). It reflects the survival and the
development of an organization (Clifton & Amran, 2011). This perspective is a reductionistic way of perceiving reality, where social and environmental issues are considered as being separate from the core business. The assumption is that social and environmental engagement is causally related to economic results (Gao & Bansal, 2013). Other researches see an organization as a social artifact whereby sustainability is a requirement. An organization should thereby create positive impacts on areas which are essential for society and environment (Zgrzywa-Ziemak, 2018). An organization should contribute towards healthy and livable societies and preservation of the environment (Zgrzywa-Ziemak, 2018). Here, social and environmental concerns are intrinsically integrated in the core business. The three dimensions of sustainability, environment, social and economic, should be regarded as a dynamic interdependence (Zgrzywa-Ziemak, 2018).
In the first perspective individual egoistic Is characterized by individualism, egoism and the acknowledgment of the primacy of rights over goods and the vision of a human being as an individual (Papuzínski 2013). In the second perspective, holistic-altruistic is characterized by altruism, acknowledgment of the primacy of good over right and the vision of a human being as a person (Zgrzywa-Ziemak, 2018). This gives a chance to resolve the current issues of the modern world. It recognizes the others persons’ welfare over its own, reduction of consumption and solidarity with others. However, the win-win approach, where economic, social and
environmental benefits are mutually supportive, may rather be exception than rule (Sekerka &
Stimel, 2011; Zgrzywa-Ziemak, 2018). Sandoval (2015) stated that economic performance is clearly placed before other two dimensions in that win-win approach. Therefore, it is important in sustainability accounting to provide insight in the trade-offs being made, which exists within the three dimensions of sustainability (Jasinski et al, 2015; Bell, Morse & Shah, 2012).
In the current sustainability frameworks, like TBL, focus is on the impact of a firm on the social development, environmental protection and economic development. It describes the contribution of a firm towards the sustainable development (Heemskerk et al, 2002). The non-financial information thereby is not for sustainable development, but rather an impression management tool to improve a company’s reputation, respond to other companies and industries and to cope with regulation and stakeholder pressure and be more resource efficient (Hahn & Kühnen, 2013).
The use of TBL, in which a company should consider the three pillars of sustainability: people, the profit and the planet, led to an inwardly focused concern, which lacks ecological
understanding (Milne & Gray, 2013). Just like the GRI framework, TBL is partial and incoherent, since the full range of social and environmental actions and interactions are too difficult to
produce acceptable performance indicators (Milne & Gray, 2013). Only sustainability reports which simultaneously include all three dimensions of sustainability and their interactions should be regarded reflecting the concept of sustainability truly (Hahn & Kühnen, 2013). Integrated reporting attempts to reference to the holistic approach by showing the connectivity of 6 capitals of sustainability (Zhou, 2011). However, Milne and Gray (2013) claim that this model is
primarily investor focused and does not reflect the concept of sustainability truly either.
Moreover, Flower (2015) stated that the framework does not require organization to report on the full impact of their operations on the stakeholders, society and environment. In Integrated
reporting there is still some degree of management discretion due to the voluntary character of the framework (Zhou, Sminett & Green, 2017). Therefore, there is not yet a complete framework for sustainability, since management then tend to report extensively on the sustainable activities and mask the unsustainable activities (Bebbington & Larrinaga, 2014; Zgrzywa-Ziemak, 2018).
A sustainability framework should deal with the voluntary character of sustainability reporting and thus report on the full impact of the activities (Milne and Gray, 2013) and show that there is a dilemma between meeting business goals and achieving sustainability (Ihlne, 2015) in order to support a holistic approach to business sustainability (Zgrzywa-Ziemak, 2018). However, TCA has been looking promising in sustainability reporting. According to Cuckston (2013) it can be seen as a way of representing the interaction between the organization, the society and the natural world in the holistic approach. The idea of TCA is to identify more sustainable ways for
producing goods and services, because it is necessary to consider the sustainability of the total current activities in sustainable development (Brunelli & Di Carlo, 2019).
TCA might help give insight in the complex economic, social and ecological processes in which sustainability should be attained (Epstein et al, 2011). It enhances sustainable development effort in a company by capturing the underlying economic, social and environmental processes in accounting (D’Onza et al, 2016). The process of TCA was developed to adjust the existing prices of products and services by the including of internal and external impact of the activities of an organization (Jasinski et al, 2015). In here, a true cost price will be generated where externalities will be included as well (D’Onza et al, 2016). Externalities occur when the activity of one agent affects the well-being of another agent outside of any type of market mechanism (Epstein et al, 2011). The Market mechanism already includes a lot of risks and impacts. However, some impacts of the operations of an organization are excluded due to a classical accounting thinking in which financial performance is the most measure of performance, due to a weak measurability of nonfinancial measures of performance or due to the complex interaction of social, ecological and economic processes (Bebbington and Larrinaga, 2014; Mancuso, 2009; Porter and Kramer, 2011). TCA attempt to include those externalities in the current cost prices to generate a true cost price (D’Onza et al, 2016)
2.2. TCA Methodology for sustainability
The application of TCA requires 4 essential steps (Bebbington et al, 2001). The first step is the defining of the cost objective. This can be a product, a process, a waste stream, an entity or an industry. The next step is to specify the scope or limit the analysis. Here, the possible
externalities are to be identified (Bebbinton et al, 2001). The third step is to identify and measure the external impact, which involves making a link between the first and second step. The
externalities of the cost objective should be measured. The last step is de determination of the cost external impact (Bebbington et al, 2001). It involves the monetizing of the externalities or determination of the costs that have not been identified in the current accounting for the cost objective.
In the first step, the definition of what cost objective to calculate the true cost for requires some background information of the current situation of an organization or activities. With the help of a stakeholder analysis or life cycle analysis, the involved stakeholders during the whole lifecycle are being identified for the cost objective (Jasinski et al, 2015). The cost objective will be dictated by the purpose of the TCA analysis (Bebbington et al, 2001).
In the second step, the relevant externalities are identified. Once the cost objective is chosen the crucial step is to determine what scope to fit onto that cost objective. In here, the determination of what externalities are to be measured within the TCA analysis is essential (Bebbington et al, 2001). In this step in is important to determine how far the analysis should go. Impacts of a product or service may occur first level, second level et cetera. It is important to consider how many layers of the impacts should be peeled off in the TCA analysis (Bebbington et al, 2001).
For electricity generation externalities occur during the use of the product, during the generation and distribution of the product and during the construction of the machinery that was used to build the power station and so on. It becomes clear that the analysis ends up with an infinite regress when trying to examine the externalities that arise. Since everything is connected, economic, social and environmental costs are difficult to allocate to certain layers of impacts effectively. It is therefore important to precisely determine where the boundary of the analysis should be. After all, some impacts may have negligible impacts on the outcome of the analysis.
Then, those outcomes are likely to be ignored (Bebbington et al, 2001).
In the third step, the data should be gathered identify the impacts arising from the cost objectives (Bebbington et al, 2001). Here, data should be gathered about the cost objective firstly. Secondly, data on the externalities related to those cost objectives should be obtained (Bebbington et al, 2001). Current accounting information systems may be very useful here, since it gathers movement of materials, consumptions and resources. Many of the impact data can be obtained using a LCA of the products or processes used. The goal of the TCA analysis should be kept in mind here, since it determines whether a LCA should be custom made or whether secondary data sources can be used. If the goal of the analysis is to get a general overview of the externalities of the operations of a cost objective secondary data sources will probably be sufficient as well (Bebbington et al, 2001).
In the fourth step, the identified externalities of the first three steps should be monetized.
There should be made a detailed assessment in determining what cost prices to use
(Bebbington et al, 2001). In the 4 steps mentioned, the most prominent issue of TCA is about which costs to include in the analysis
2.3. Adoption of TCA
TCA has been applied in many industrial settings within the oil, gas, energy, chemical and waste management industries (Jasinski et al, 2015). Jasinski et al (2015) found 35 empirical and
conceptual applications of TCA as case study or as experiment. The findings out of the overview of Jasinski et al (2015) of the TCA applications are that up to 2003 those studies show a
dominance of the economic and environmental aspects of sustainability and the social dimension of sustainability was ignored. Since 2003 several studies have been done, which attempted to
integrate the social dimension as well. The experiences here were that the measuring of the upstream and downstream impacts of activities is often difficult to determine (Jasinski et al, 2015). The outcomes of the past applications of TCA are the development of ten methods, which are all still incomplete with only a few practical applications (Jasinski et al, 2015). Since the publication of Jasinski et al (2015) till today, researchers have used those data base for TCA practices. However, the application of in the Netherlands is still limited. In 2017, EY et al (2017) performed a TCA analysis on the true cost of food in Eosta in the Netherlands. This was the first ever performed analysis for a Dutch MKB-company. Besides that, the application of TCA in the Netherlands so for is limited.
The obstacles of a successful implementation of TCA are manifold. First of all, there is a weak measurability of the externalities and it is hard to monetize them (Clémence, et al, 2010). Non- economic results are hard to measure, since the underlying ecological and social processes are complex (Unerman & Chapman, 2014). Therefore, it is difficult to assign a certain value to the external effects of those processes (Bebbington, et al, 2014). It is still a challenge of
commiserating social and environmental impacts of the activities of an organization (Unerman et al, 2014). The separate dimensions of sustainability make it difficult to have the same scales of measurement and their weights of those scales are not comparable (Ihlen, 2015). Moreover, the social, environmental and economic dimension of sustainability are not mutual supportive, which lead to unsolvable conflicts (Milne and Gray, 2013). Moreover, is difficult to include all impact on stakeholder precisely in the TCA framework. Stakeholder can be short term or long term, current or future oriented. Here, it is difficult to precisely quantify the claim of the stakeholder to the organization (Zgrzywa-Ziemak, 2018)
2.4. The energy sector
It is generally accepted that sustainable energy generation is better for the environment and contributes towards a cleaner world. The choice for more sustainable energy therefore is a choice for a better future and a more livable climate for future generations. Producers, managers and consumers should be enables to make a more sustainable choice it they are willing to. Moreover, it enables companies to communicate the sustainability of their operations more effectively and it protect markets against unfair competition by producers that can supply at low cost while having large environmental externalities (Brannan, et al, 2012; Rajagopalan et al, 2012) Therefore, it is important to define and label sustainable energy (Hulshof et al, 2019). Currently the green energy, like wind and solar energy generation, is being considered as sustainable energy by the public, government and businesses. Any source of energy that is free of fossil fuels is considered as being sustainable (Freedenthal, 2013). This determination of whether the energy generation is sustainable therefore only looks at the input of the energy generation and it focusses primarily on the environmental impacts of the energy generation (Freedenthal, 2013). This is a limited notion of the concept of sustainability. In order to determine the degree of sustainability of the energy generation, a full impact analysis of the energy generation on the society, environment and economy is required (Bebbington & Larrinaga, 2014). The cost prices should reflect all the different processes of the operations. Here, the plant level costs, system costs should be extended with the externalities of energy generation in order to reflect the true cost of energy.
The current cost prices reflect the plant level costs and system costs primarily (Epstein et al, 2011). In order to enable people to choose for sustainable energy generation the current labeling of sustainable energy should be broadened. The added value of TCA in the energy generation is that it enables people to have insight in how to make a responsible choice for their energy usage.
TCA has a direct link to sustainability, since it sheds light onto the complex dynamic that arises from the interaction between human and environmental systems (Spangenberg, 2011). It suggests that identifying more sustainable ways for obtaining goods and services requires shedding light on the sustainability or unsustainability or current activities by assigning a value to the use of otherwise free environmental and social services (Bebbington & Larrinaga, 2014).
Within the energy sector many subsidies exist, by which the government attempts to support energy generation (Niesten et al, 2018). Since subsidies are indirectly paid by the society, it is important to consider what role subsidies are playing in the true cost price of energy. Without subsidies, many businesses would not exist, since in a “free market” they would not survive (Niesten et al, 2018). In the Dutch energy market, subsidies are placed on the unprofitable top of the cost price (RVO, 2019). Here, the difference between the true price and the market price is subsidized, since otherwise in a free market energy companies would not be able to sustain their businesses (Niesten et al, 2018). Subsidies are mainly used by governments to promote
businesses that create net welfare for the society, environment or economy, but which cannot sustain in a financial-oriented free market (Sowa & EDPRI, 2007). With the help of subsidies, governments can by-pass the market system in the distribution of resources in way that helps the total economic, social and environmental welfare (Sowa & EDPRI, 2007). Subsidies are a cost for the society. However, they are used to provide benefits for the society or environment, which are currently not accurately reflected in the market (Nielsen et al, 2018). Thus, when calculating the true cost of energy, integrating subsidies as a cost in TCA may be irrelevant, since otherwise the costs would be counted twice (ExternE, 2005).
2.5. Application of TCA in the Energy generation
In the energy generation industry, the TCA framework was applied in a major research programme of External costs of energy in Europe. Here, background on the quantification of externalities of energy generation was provided and guidelines on how to internalize those externalities were presented (Bickel & Friedrich, 2004). The programme calculated the impact costs. Within the energy sector the measures and values for the external costs of this programme can be used as standards to value externalities.
For the application of TCA in the framework of Bebbington et al (2001) in the Dutch energy generation the first step is to identify the cost objective and the stakeholders of that cost objective of energy generation throughout the lifecycle of wind energy- and coal energy generation.
Stakeholders theory tells us that it is important that the interests of all stakeholders should be taken into consideration in management (Freeman & Phillips, 2002). TCA incorporates all claims of the stakeholders and simultaneously cover the concept of sustainability in the accounting information. The concept of sustainability will be integrated in the cost prices. Consequently, a lower cost prices would constitute a more sustainable product or service. Since all economic,
social and environmental costs would be included in the cost prices via the claims of the
stakeholders, the cost price would reflect the concept of sustainability more effectively (D’Onza et al, 2016).
The cost objective identification is crucial for the TCA application in the energy generation.
When examining the externalities that arise in the energy generation processes, it is not very useful to attempt to include all layers of impacts in TCA analysis, since data problems appear very quickly. Moreover, attributing the percentage of impact from upstream external impacts in energy generation would be very difficult (Bebbington et al, 2001). Also, the more upstream the analysis goes, the smaller the impacts in the next layer is likely to be (Bebbington et al, 2001).
However, Bebbington (2007) stated that to address the concept of sustainability fully, the assessment may not be blind to upstream and downstream effect. For a full analysis of the
sustainability of energy production the assessment should consider the life cycle impacts (Howes, 2002). The current academic literature about the identification of stakeholders in the life cycle of energy generation is summarized in table 1.
To include the upstream and downstream effects of energy generation a life cycle assessment is important for identifying the full impacts of activities (Bebbington, 2007; Howes, 2002). A life cycle assessment is central to TCA to guide policies and investments, which should enable sustainable performance (Epstein et al, 2011). A life cycle assessment is a technique for the assessment of impacts on the environment and the society of products and services (Varun et al, 2009). In here all stakeholders and the impact the operations have on them, are assessed
throughout the whole life cycle in order to measure and compare the external impacts of different goods and services (Varun et al, 2009). A LCA helps to get a full perspective on your products and services and the impacts that go along in the whole life cycle. It provides insight in the footprint of the products or services (Greory et al, 2009). This may be helpful in TCA.
Table 1. Stakeholder analysis in the life cycle of the energy generation process of coal- and wind energy.
Stakeholders Coal energy generation Wind energy generation Workers in
mining areas
Yearly many deaths, injuries and illnesses due to the mining operations (Esptein et al, 2011) Hischberg et al (1998); estimated the amount of deaths in coal energy generation to be around 342 per TWr;
For wind energy generation Hirschberg et al (1998) estimated the amount of deaths to be more than three times less than in coal energy generation, at around
103 deaths per TWr;
Energy company Energy companies need energy generation to sell energy.
Energy companies need energy generation to sell energy and renewable
Fossil fuel energy does lead to a lower systematic risk for the company (Sadorsky, 2012);
energy generation has a negative impact on the company’s systematic risk
(Sadorsky, 2012);
Consumers prefer green energy. Selling wind energy may be an competitive
advantage for energy companies (Kaenzig et al, 2013; Gracia et al, 2012);
Local
communities
Coal fired power plant produces noise and visual impacts (Kisku &
Bhargava, 2006);
Value of property near a wind turbine is negatively affected due to visual and noise impacts (Jensen et al,
2018; Kontogianni et al, 2014); Compensation by the government for those who are affected by wind energy generation (Landeta-Manzano et al,
2018);
Wind power developments generates benefits like ownerships, participation and economic incentives for local communities (Aitken, 2010)
Employees Salary helps boosting the social and economic wellbeing of the
employees (Fox, 2017);
Coal energy generation create more than twice as much jobs than wind energy generation does
(Chatzimouratidis &
Pilavachi, 2008);
Salary helps boosting the social and economic well-being of the employees (Fox, 2017);
Farmers Emission of pollutants lead to losses on crops (Samadi, 2017);
Many Farmers or co-operatives in the Netherlands place a windmill in their backyard and generate economic benefits (Aitken, 2010; Toke, 2005);
Investors Unsustainable claimed projects are becoming less attractive to invest in (GfK, 2018);
Sustainable projects have become more attractive to invest in (GfK, 2018;
Mueller et al, 2016)
Participation, ownership and economic incentives in wind developments boosts the profitability of investors (Aitken, 2010);
Public in the Netherlands
Coal combustion wastes are known to cause cancer, birth defects, learnings disabilities, kidney diseases and diabetes
(Environmental integrity project, 2009; Epstein et al,
2011);
Combustion lead to byproducts like CO2, methane, nitrogen, sulfur, mercury and some carcinogenic chemicals and heavy metals, which contributes to air pollution and climate change (Epstein et al, 2011);
Noise and visual impacts are linked to health problems (Baxter et al, 2013;
Pedersen & Waye, 2007);
Consumers A cheap and stable power supply lead to social and economic well- being (Fell,
2020);
Lower energy bill is related to less stress and
depression (Uutela, 2010);
Consumers prefer green energy above grey energy generation (Kaenzig et al,
2013; Gerlach & Zheng, 2018);
Water supply companies
Chemicals are emitted in the water supply in the life cycle of coal energy generation which should be removed (Palmer et al, 2010); High usage of scarce water in combustion stage of coal energy generation (Epstein et al, 2011);
Water is required to drive the water extraction, utilization and wastewater treatment in the wind power generation systems. Water is a scarce resource. However, wind energy generation requires less water than coal energy generation does (Samadi, 2017; Shevah, 2014);
Future generation
Emission of greenhouse gasses is positively related to climate change (Epstein et al, 2011). Coal energy generation emits more greenhouse gasses in the life cycle than wind energy generation does (Samadi, 2017);
To expose coal streams explosives are used to clear forests, which contributes to deforestation (Epstein et al, 2011; Fox &
Campbell, 2010); Methane is emitted during the mining, which contributes to climate change (Epstein et al,
2011);
Wind energy support the energy transition towards a sustainable world (Epstein et al, 2011);
Upstream, many electrical, electronic and mechanical components are required to build a turbine, which have an ecological footprint.
This may become unbeneficial for future generations
(Martinez et al, 2009);
Moreover, the material and components used are not fully recyclable (Jensen, 2018). The blades of the wind turbine are for example not recyclable, which lead to a huge waste stream in the future
(Jensen, 2019; RD, 2019);
Grid operators Low balancing costs for the grid (Ayodele et al, 2020);
Breakdowns are easier to prevent than with renewable energy generation (Ayodele et al, 2020);
Challenges in transmitting a constant energy supply across the country and prevent breakdowns (Ayodele et al,
2020);
Wind energy cannot be stored.
Therefore, a constant energy supply will be challenging. This raises energy balancing costs (Volkskrant, 2019;
Ayodele et al, 2020);
Government Dutch government must comply to the climate agreement and CO2 emissions restrictions. Coal energy generation may therefore lead to compliance difficulties
(Harris & Lee, 2017);
Wind power helps the government to reduce the CO2 emissions (Panwar et al,
2011; Dai et al, 2015);
Animals Biodiversity is lost, due to the emissions of pollutants (Epstein et al, 2011);
Due to the removal of forests for the mining processes, biodiversity is threatened (Fox and Campbell, 2010);
Wildlife is negatively affected. Birds, bats and marine animals are affected by offshore wind turbines due to deaths or disturbances in their ecosystems (Drewit & Langston, 2006;
Dai et al, 2015);
Wind farms may create artificial reefs, which may affect biodiversity positively (Dai et al, 2015);
Landowners Coal energy generation requires around 40 times less land than wind energy generation, based on global literature (Pimentel et al,
1994);
Value of properties is negatively affected by the noise and visual impacts of wind turbines (Evans et al, 2011;
Taylor et al, 2015)
Value of land might increase further due to the land use of a wind turbine and the scarcity of land in the
Netherlands (Worldbank, 2018; Nvm, 2020);
Change of destination plan by government lead to drop in value of the land
(Rijksoverheid, 2020);
Banks Banks are important in the energy transition (Triodos Bank, 2019);
Banks are important in the energy transition (Triodos Bank, 2019);
For the second step of the TCA application in the Dutch energy generation the relevant externalities of wind- and coal energy generation should be determined. Here, managers and other users of accounting information may face an information overload, since there are endless amounts of externalities in the energy generation process. Therefore, it might be important to include the concept of materiality in this research. Materiality reflects the organization’s significant economic, environmental and social impacts that substantively influence the assessment and the decisions of stakeholders (GRI, 2013, p.7), Materiality is an important concept in accountancy (Mio et al, 2020). It influences the information flowing from companies to the stakeholders, shapes the decision making of managers (Adams, 2015) and plays an essential role in minimizing the risk of information overload. Not all external impacts on stakeholder will have an influence on the decision making of people and companies and many externalities are hard to measure or quantify. Therefore, some externalities may be left out, to safeguard the reliability of the analysis and reduce the costs and time consumption of the analysis. To determine what externalities to include and to left out of the analysis a materiality assessment can be used (Calabrese et al, 2016; Zhou, 2011). The goal of the materiality
assessment in sustainability reporting is to identify, select and prioritize the environmental, social and economic impacts that have the most significance to the stakeholders (Calabrese et al, 2016) Here, the most relevant impacts within the cost objective are determined. The stakeholders’
concern or interest in the entity’s performance on the one hand and the power of the current or potential impacts on the stakeholder on the other hand should be determined to judge whether to include the stakeholders’ claim in the sustainability reporting (Zhou, 2011). When adopting a materiality assessment of the stakeholders’ claims in TCA, the cost price would reflect the most significant claims or costs of stakeholders in the cost price. This should enable making the concept of sustainability more operational (Spangenberg, 2011).
In the third step and forth of the application of TCA in the energy market, it is important to measure the identified impacts of step 1 and step 2 and monetize them in terms of money.
Company records, governmental reports, technical reports or stakeholder opinion can be gathered to gain insight in the cost of the relevant externalities (Bebbington et al, 2001). The finding of the major research program of external costs of energy (ExterE, 2005) which supports the calculating of the impact costs of energy, can be used in the TCA analysis (Jasinski et al, 2015). Moreover, literature about the monetization of all impact can be used to calculate as secondary data source in the calculation of the true cost price. Sundqvist and Soederholm (2002) did a statistical analysis of literature on the external costs for energy technology. The externalities for coal were valued between 0,06 cent/kwh and 66,22 cent/kwh with an average of all 29 observations of 12,44-dollar cent/kwh. In here the median is 8,30 cent/kwh and the standard deviation 16,89. The externalities for wind energy generation were valued between 0 dollar/kwh and 0,73 cent/kwh with an average of all 14 observations of 0,27 cent/kwh. In here the median is 0,29 cent/kwh and the standard deviation 0,18. The variation in estimation is wide. To analyze the external costs in detail it is necessary to precisely estimate the cost of every damage caused by individual
pollutants and a potential catastrophe in the whole fuel cycle (Bielecki et al, 2020). The value of these externalities should be added to the current plant level and system costs of energy
generation to arrive at the true cost (Samadi, 2017).
2.6. Conceptual model
Figure 1. Conceptual Model
3. Methodology
This section provides insight into the research design of this study and what methodology of TCA is used. Next, the data analysis plan is discussed and finally the case companies are introduced.
3.1 Research design
This research aims to bridge the gap between research and practice by creating a True Cost Accounting Framework, specified for the Dutch energy production. Many literatures about the externalities of wind energy and coal energy generation exist (Epstein et al, 2011; Wang et al, 2018). However, in practice many externalities of the energy generation are not yet included in the accounting information (Gies, 2017). This is relevant for accounting, since the completer and more relevant the accounting information is, the better the decision usefulness of the accounting information is (Staubus, 2016). Moreover, literature about the externalities about the Dutch
Application of TCA in the Dutch the Dutch market
Whether the concept of sustainability is more
effectively reflected in the cost price
energy generation is limited. Therefore, it is interesting to see how the literature about the externalities of energy generation abroad is applicable for the energy generation in the
Netherlands. The energy sector has an important role towards the energy transition (Wu et al, 2018). It is therefore important to apply true cost accounting in the energy production, because true cost accounting will help include social and environmental aspects in the accounting of energy generation more effectively (Epstein et al, 2011). A qualitative approach is required, because this research aims to understand the processes behind the connection between true cost accounting and the energy production and it includes the creation of a true cost price framework (Eisenhard & Graebner, 2007). Here, a wider view of the cost price of the energy production will be created. Literature review will be conducted to map the externalities and how that affects stakeholders. After that, the interviews will be conducted to find pattern in the internalization of externalities in the energy production market in order to generalize the findings to the whole energy market. Inductive reasoning is used to find out how certain patterns on the including of externalities in the accounting information might be applicable in the whole energy market (Hyde, 2000).
3.2. Case study
For this research three case studies will be executed. To compare two types of energy generation a multiple case study is needed. Two different types of cases are being studied with the goal to create the same types of results for both companies. A case study can be used to explain a relationship, describe an intervention, describe different subjects and at the same time clarify a certain phenomenon (Yin, 2017). In the case study for coal- and wind energy generation a comparison is made in wind energy between onshore and offshore wind energy, since the cost structures of both types of energy generation is different and therefore both will have a different true cost. In order to make conclusions about the true cost of wind power generation, that distinction is needed. For coal energy generation the same applies. CCS technology is a
promising technology which may reduce the GHG emission and the air pollution. However, the costs of implementing that technology are significant. Therefore, it is interesting to see what the true cost of coal energy generation with CCS technology will be. For this study different subjects are being analyzed and compared in order to make concluding remarks about both cases.
Therefore, a case study is suitable (Yin, 2017). This case study is called a theoretical replication (Yin, 2017). Since a theoretical replication is being used, this research will be positivistic. In here the researcher is not part of the research. In order to get an overview of the differences of results of both case companies, the researcher should be excluded of the research. Otherwise the
researcher could influence the results of both case companies in different ways, which should lower the validity of the results.
During this case study research, three employees of two different types of energy generating companies will be extensively interviewed at one moment in time. This would provide a better understanding in what the externalities of energy generation are, how externalities are being integrated in practice and to what degree sustainability is included in the cost prices of energy. In here, the literature findings about externalities in the energy production will be proposed to the interviewees to compare literature and practice. Moreover, a stakeholder of energy generation will be interviewed in order to validate the impacts the energy generation have on them as
empirical evidence. A governmental body on the department of energy transition will be
interviewed to determine whether the externalities literature prescribes are being included in the cost prices in practice. Moreover, an employee and researcher at the university of Groningen on the faculty of Science and Engineering who does research on Energy and Environmental Science will be interviewed, since the researcher expects that he has a lot of expertise of the impacts of energy production.
3.3. Methodology of TCA
To apply TCA in the energy generation, the researcher should first identify the cost object. In here the energy generation process will be analyzed. Secondly, the scope of the analysis will be determined. A stakeholder analysis and materiality assessment will be performed in the
interviews to provide insight in the relevant stakeholders and externalities in the life cycle of energy generation. Next, the impact analysis and monetizing of those impacts will be done. The researcher attempts to use the expertise of the respondent in the measurement and monetizing of the impacts of energy generation. Moreover, secondary data sources will be used to provide insight in the measurement and monetizing of the economic, social and environmental impacts of energy generation. In academic literature, life cycle analyses of energy generation are performed to measure and monetize full impacts of energy generation in terms of money. Together, the interview data and the desk research should enable the researcher to calculate the true cost of energy. This should contribute to the existing literature, since the concept of TCA will be specified for the Dutch energy market.
3.4. Data
After the desk research and the interviews, the notes and interviews will be transcribed and the researcher attempts to identify relation patterns to interpret how the externalities affect the costs of wind- and coal energy at the case companies. After the data collection a cross case synthesis is being used, in which all the data will be integrated to make some concluding remarks. To
generalize the finding to the population analytical generalization is being used. In here, general patterns are being analyzed which could explain a certain phenomenon (Yin, 2017). The conclusions will be compared against the current academic literature on the topic of True Cost Accounting and externalities. Moreover, the researcher attempts to determine to what degree the case companies do take externalities into account in their current cost prices to investigate whether the current cost prices reflect the concept of sustainability.
There are four principles for the data collection in case study research (Yin, 2017). First of all, multiple sources of data should be used. Data triangulation is used in this research. The use of news articles, a literature review, the interviews data and public case company and governmental documents are used in order to get insight in the current cost structures of the energy production (See appendix 9). The use of a multi method for data collection results in stronger findings (Eisenhardt, 1989). The data required for this research therefore will consist of both quantitative and qualitative data. By using qualitative instruments, like the semi structured interviews,
primary data is collected. With the help of these instruments, the researcher gets an understanding about to what degree energy companies take account for their externalities already.
For quantitative data, a literature review of the monetizing of externalities will be conducted.
Many literature about externalities and the valuing and monetizing of those externalities exist.
The semi-structured interviews are conducted with the financial experts of Vandebron,
Greenchoice and RWE, since they have an in depth understanding of their cost structures and the externalities their operations has. In order to bridge the gap between literature about externalities and the use of externalities in the energy production in practice, the expertise of the financial experts in the energy market is needed. Secondly, a case study database should be created (Yin, 2017). In this database, notes, documents, interview questions and narrative should be included (Appendix). Notes of the case companies should be attached, just as the interview transcripts.
Third of all, the process of data collection should be clarified to make sure other people could do the same research (Yin, 2017). The interview will be performed semi structured, since then there is less room for the researcher to influence the outcomes. At last, electronic sources should be used in the data collection process. Articles and books are being used online in the literature review to have insight in the externalities of coal fired power plant energy and wind energy.
These electronic sources together with the interview data help the researcher in determining to what extend externalities are already being taken account for in practice to be able to get
understanding in the degree to which the concept of sustainability is included in the current cost prices of energy.
3.5. Data analysis plan
To analyze the data of the interviews and the literature reviews patterns are being analyzed in order to be able to generalize the findings to the total energy market. To answer the research question the interview questions will be split in different sub parts. The interview questions are based on those parts. The first part will be about the identification of externalities of energy generation and to what extent the energy market includes externalities in their cost prices. The second part will be about the monetizing of those variables. Many literature about the monetizing of those externalities exists, however it is not yet specified for the characteristics of the
Netherlands. Therefore, the literature findings will be discussed with the respondents to generate a true cost price specified for the Dutch energy generation. The interview data will provide insight in how both case companies deal with the externalities of energy generation. The data required for this research is the literature overview of the externalities of both the Coal energy generation and the wind energy generation. This will be complemented with the interview data.
Theory and practice will be compared to see how wind energy and coal energy differ in the TCA perspective. How do both case companies take account for externalities and will wind energy still be sustainable?
The numbers of interviewees are five: Two interviewees of the wind energy generation sector and one interviewees of the coal energy generation sector. Those people should have enough expertise about whether externalities are being taken account for in practice in the energy sector. During the interview with the case companies the finding out of the literature will be proposed to the respondents to see how theory and literature differ on this matter. The interviewees will be selected by their initial function. Their company function is the selection criteria. The employees of the companies in the energy market have expertise on how their cost structure is and to which degree externalities are being taken account for. Since those interviewees are expected to have
enough expertise to help answering the research question, five interviewees are expected to be significant enough to be able to generalize the findings over the total energy market.
Especially, because a comparison between two types of energy generation in the Dutch energy market will generate a more generalized view on the whole energy market.
The contact with all the interviewees is made with the help of e-mail, LinkedIn and by customer services. The interview will be introduced by referring to the goal of this research and why interviewees might help attaining this goal. The interviews will be recorded, with the permission of the interviewees. After that, the interviews are transcribed and certain notes of the interviews will be made. The duration of the interview, the place of the interview and the quality of the interview will be written down, see appendix. The next step is the result section. In here certain quotes are used to support the answering of the research question.
3.6. Case companies
During this case study three energy companies are interviewed to discuss their position in the society, their stakeholders and how their stakeholders are affected by the energy generation.
Vandebron, Greenchoice and RWE are energy companies in the Netherlands which all have a different business model. Therefore, it is interesting to see how those companies deal with the sustainability of their energy production. Those three case companies are expected to
contribute in the TCA-analysis and verify the current academic literature findings.
Vandebron
Vandebron is a Dutch energy company which has an online marketplace where only producers of wind- and solar energy can sell their locally generated wind- and solar energy (Vandebron, 2020).
Vandebron is an intermediary, which means they usually do not interact with many stakeholders.
Vandebron is founded in 2013 and since then they grew to 200.000 customers. In
2019, Essent bought all the shares of Vandebron, which made Vandebron a subsidiary of Essent.
Greenchoice
Just like Vandebron, Greenchoice is a Dutch energy company which is only focused on the selling of renewable energy. Greenchoice does have wind turbines in own custody (Greenchoice, 2020) has. Therefore, they interact with many stakeholders in the planning and building phase and when the wind turbines are operational. Greenchoice was founded in 2001 and since then Greenchoice grew to a total of 600.000 customers. Their owners are Energie Concurrent B.V. and Eneco.
RWE
RWE is a German energy company who operates in several European countries, among which in the Netherlands (RWE, 2020). It was founded in 1898. RWE is owner of the Dutch energy company Essent, which has 2.4 million customers in the Netherlands. Where Vandebron and Greenchoice are only focused on renewable energy generation, RWE has a wider energy generation supply. RWE is active in coal energy generation, on among other things. In
Eemshaven, RWE has a coal fired power plant, which is one of the most modern of Europe. The case study will be performed at that power plant. The Dutch government mandates the power plant to close all coal energy generation activities, after which the power plant will be used for biomass production.
4. Results
In this sector the steps of TCA methodology are discussed and the overall findings of the application of TCA in the Dutch energy market will be shown. At the end of this section the current cost prices and the internalization of externalities in the current cost prices will be discussed.
4.1. Defining the cost objective
The first step of the TCA application is the defining of the cost objective. It is difficult to include all layers of impacts of energy generation due to data gathering problems, since the upstream impacts of energy generation are difficult to attribute accurately to the energy generation
(Bebbington et al, 2001). However, according to Bebbington (2007) it is important to include the upstream and downstream effect of the cost objective to determine sustainability performance in the cost objective. For coal- and wind energy generation that implies to include the production and the use of the resources required for the operating of the power plants, besides the processes of the energy generation itself. Therefore, the cost objective is the energy production together with the upstream and downstream costs of the production and decomposing of the power plant.
A stakeholder analysis was performed with the respondents to identify the most important stakeholders in the energy generation process. In table 2 quotes of the respondents about the identification of the stakeholders of wind energy generation are presented.
Table 2. Quotes of respondent on stakeholder identification of wind energy generation
Reference Quotes
Respondent 1 “To receive capital, banks are involved and they oversee the sustainability indicators are met”
Respondent 1 “The constructors of the wind turbines often remain influential during the life time of a wind turbine”
Respondent 1 “The administrator of the wind turbines does keep the wind park in custody, who delegate the maintenance to other parties and manages the insurance of the park”
Respondent 1 “During the exploitation, many other parties will be involved in the generation process, like local communities”
Respondent 1 “Also, the grid operator should take measure to deal with the added flexibility of wind energy production in the grid”
Respondent 3 “The producers of wind energy are involved in the process of energy generation actively”
Respondent 4 “It is important to find an industry which finds it attractive to use the nonrecyclable materials of wind turbines. So that will be a problem in the future”
Respondent 4 “Animals are affected by the wind turbines, since some birds are sensitive for the turbines”
Respondent 5 “Local communities are enabled to participate in the economic benefits of a wind turbine”
Respondent 5 “It is important to actively integrate local communities in the energy transition”
Respondent 5 “Moreover, we want as government to include environmental organization in the discussion as well, in order to make an integral judgement of the towards
sustainability”
Respondent 5 “There is currently a generation of wind turbines where we do not have a destination for in the future, which will be problematic for future generations”
For coal energy generation, in table 3 the quotes of the respondents about the identification of the stakeholders of coal energy generation are presented.
Table 3. Quotes of respondent on stakeholder identification of wind energy generation Reference Quotes
Respondent 2 “Governmental institutions, social media, suppliers, local communities, the seaport where coals arrive are all involved with our coal energy production”
Respondent 2 “Also, the 300 employees of our power plant, customers like you and me, the management, environmental officers are internally involved in the process”
Respondent 2 “In the past we have seen protest groups, which made our work less safe at the power plant”
Respondent 4 “Here, we often see the bigger institutions as stakeholders. Stakeholders like local communities, environmental institutions, animals, gird operators, the politics, and the local governments are involved in the energy generation of coal- and wind energy generation”
Respondent 4 “We see that in during the energy generation life cycle in the transport, storage, mining and combustion processes many societies are affected”
Respondent 5 “For coal energy generation, we see that the climate and the air quality are affected, which is costly for the society”
