Month: April 2018

Lyft combats climate change with every ride

Lyft-Carbon-Offsets

Funding emission reduction projects and catalyzing change in transportation

lyft-logolyfts-goalsLyft, the global ride-hailing service, cares deeply about their impact on the environment and the communities they serve. In 2017, Lyft announced their 2025 climate impact goals, which include moving to autonomous electric vehicles powered by renewable energy and reducing overall CO2 emissions in the transportation sector.  As part of delivering on their Green Cities Initiative in support of these goals, Lyft partnered with 3Degrees to look for both near-term and longer-term opportunities to reduce their environmental impact.

Key challenges

Emissions from the transportation sector are a stubborn problem. Petroleum-based fuels like gasoline are deeply embedded in our vehicle and fuel distribution infrastructure, resulting in large quantities of carbon dioxide and other tailpipe emissions. Lyft’s vision for addressing this is an all-electric vehicle fleet powered by 100% renewable electricity – an ambitious goal that will take time to accomplish. In the meantime, Lyft sought to take immediate steps to address its environmental impact in a relevant and meaningful way.

Lyft set an aggressive goal – to offset emissions from all Lyft rides worldwide.

And the company wanted to be intentional about the projects in which they invested, placing a high priority on projects in the transportation sector, near their major markets or in some other way relevant to Lyft’s business.

How we helped

our-approach-for-lyft

In collaboration with Lyft’s sustainability team, 3Degrees designed a program that would meet the above goals and have the flexibility to evolve and grow with Lyft’s business. The program uses carbon offsets as a tool to fund emission reduction projects that result in tangible changes in the way parts of the transportation sector operate. The program is also funding projects that help address other environmental impacts from vehicle use, such as water and non-climate air emissions.

The key elements of the Lyft program designed by 3Degrees are:

  • Environmental integrity is the most important aspect of the program design and a core element of every carbon offset sold by 3Degrees. Environmental integrity can generally be broken down into two main components: (a) “additionality,” the notion that the emission reductions would not have been achieved without the promise of funding from carbon offset sales, and (b) rigorous and conservative quantification of the actual emission reductions achieved. All 3Degrees projects are registered under internationally recognized standards maintained by not-for-profit environmental organizations, including the American Carbon Registry (ACR), Climate Action Reserve (CAR), and Verified Carbon Standard (VCS). These standards require that project emission reductions are monitored and quantified on a regular basis and that this quantification and project additionality are independently verified by accredited third parties.
  • Reductions in transportation sector emissions play a major role in the project portfolio. Initially, this includes emission reduction projects in automotive manufacturing and waste oil recycling, and in the medium term could include newer project types like vehicle electrification. Projects like these have a direct connection to the automotive supply chain (and Lyft’s Scope 3 emissions). Offset funding acts as an incentive or catalyst for actors in these industry segments to implement practice changes that are cleaner and more sustainable.
  • Positive impacts on Lyft communities take the form of social and environmental co-benefits (apart from climate benefits) in and around the markets that Lyft serves. For example, land use projects like forestry offer important air and water quality benefits that are more localized in nature than greenhouse gas benefits. Similarly, renewable power projects like wind energy help displace coal-fired power generation, which in addition to CO2 also emit mercury into the air and ultimately the regional water supply.

Leveraging 3Degrees’ experience in transportation and our proprietary project portfolio, the majority of Lyft’s initial investment is being used to support one-of-a-kind projects in the transportation sector that have a demonstrated impact and the potential for scalability . This enables Lyft to fund immediate emission reductions, like the Meridian magnesium automotive manufacturing project (see project spotlight below), while paving the way for new projects that leverage this experience.

This portfolio is intended to evolve as part of Lyft’s overall sustainability journey towards their 2025 climate impact goals, including electrification of their fleet. In the early years of the program, most of the offsets will come from existing projects. Such projects will gradually be supplemented by new projects custom-built for Lyft and the communities it serves. In the long run, new development will be concentrated in the renewable electricity sector to support Lyft’s transition to an all-electric fleet.

“3Degrees’ ability to develop unique emission reduction projects with a high level of environmental integrity made them a natural fit for us. Their depth of experience, analytical rigor, and creativity helped us craft a program that can change over time and as our needs evolve. ” 

–Sam Arons, director of sustainability at Lyft

Results

  • Starting in 2018, Lyft is offsetting the emissions from all rides across the globe. This includes emissions created while a passenger is in the vehicle and also those created while a driver is en-route to pick up a passenger.
  • Lyft’s voluntary offset program is one of the largest in the U.S. and among the top 10 in the world .
  • All offset projects are located in the U.S. and have local social and environmental benefits in or near Lyft’s U.S. markets.
  • More than 75% of Lyft’s initial investment is funding emission reductions in the transportation sector from projects that are catalyzing change in the industry.

Lyft-results

 


 Project Spotlight

Carbon offsets lead to real change in automotive manufacturing process

The Meridian Magnesium project is the largest component of Lyft’s initial portfolio. Located just outside of one of Lyft’s major markets, Meridian manufactures automotive parts that help lightweight vehicles and improve vehicle fuel efficiency.

Lyft is funding emission reductions at Meridian’s Michigan manufacturing facility. This project required an upfront capital investment by Meridian as well as a change in Meridian’s manufacturing process that, while reducing greenhouse gas emissions, is more expensive and less efficient than the previous process. Carbon offset sales are the only source of revenue for this project. Without it, Meridian would have no motivation to operate this project.

Meridian was the first magnesium auto parts manufacturer to undertake this change and helped establish a new offset methodology that could be used by all magnesium part manufacturers. The project was just successfully re-validated by NSF International under the Verified Carbon Standard, affirming the scale and scope of the project’s real and permanent climate impact.

Now, based on Meridian’s demonstrated ability to implement this change and fund it with proceeds from offset sales, 3Degrees is discussing similar projects with two other magnesium producers that have not yet made the switch.

More on 3Degrees Carbon Offsets

GreenTrees: reforestation project

GreenTrees: reforestation project

Trees and forests have been an important resource since the beginning of mankind. For centuries, trees have been used for heat, shelter and a variety of other needs. In all cases, trees were cut down to be of benefit. More recently, we have discovered that trees are also an important resource when left standing.

The Mississippi Alluvial Valley (MAV) has been called North America’s Amazon because of the fertility of its soil and the animal and plant life it supports. This is a vital ecosystem for 60% of all migrating American bird species and multiple endangered species. But development and farming have led to significant deforestation of the MAV; today only 20% of the original forest remains.

The GreenTrees project is working to turn that tide. This project works with local farmers to convert marginal croplands back into forests. To date, they have planted over 30 million trees on 120,000 acres in partnership with 500 landowners. The project uses an innovative approach where they plant fast growing cottonwoods with slower growing hardwood seedlings. The cottonwoods shade the hardwoods, accelerating their growth and thus the carbon capture and habitat development.  

In addition to the carbon offsets created from the carbon dioxide absorbed by these trees, this project creates a number of additional benefits:

+ Reduced nitrogen and phosphorus runoff 

+ Improved water quality and improved flood control

+ Additional revenue for farmers

+ Jobs created in local communities

+ Habitat creation for migratory bird populations

WHAT’S A FORESTRY CARBON CREDIT?

Carbon offsets from forestry projects are created when one metric ton of carbon dioxide is absorbed by the forest. As trees grow, they absorb carbon dioxide from the atmosphere through photosynthesis. Forestry carbon offsets are measured through a robust protocol of forest monitoring and scientific verification.

3DEGREES + CARBON OFFSETS

At 3Degrees, we are committed to bringing high quality carbon offset projects to the market, providing our customers with unique and meaningful projects.

Why my work matters: Sarah Penndorf

sarah-penndorf

Sarah Penndorf is a director in the 3Degrees energy and climate practice.

Some of my favorite recent projects:germany-europe-wind-energy

  • Helped a global luxury brand to magnify the impact of their renewable energy purchase by developing and validating project options with significant co-benefits such as community resilience with a focus on women. Currently implementing the selected project.
  • For an international food manufacturer with a footprint spanning 40 countries, developing country-level and regional strategies and implementation plans to meet the company’s aggressive carbon reduction goal.
  • For a European-based financial services firm, worked with the head of sustainability to build stakeholder alignment and the business case for a virtual power purchase agreement (VPPA).

 

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This work requires a lot of creativity because every client has a unique set of goals, challenges and opportunities.

 Special skills & expertise

sustainability excellence purchase-agreement global identify
Head of 3Degrees Sustainability Center of Excellence 15 years in sustainability and environmental consulting Skilled in educating and building alignment across stakeholder groups Experienced in developing carbon reduction and renewable energy strategies in North America, South America and Eastern Europe Superpower:
Broad sustainability expertise allows her to identify hidden opportunities

 Watch Sarah’s video:

Is the success fee model working for our industry?

Transaction: Success Fee Model

Your company has taken the bold move to set renewable energy and carbon emissions goals.  You have done the work to get the key stakeholders to consider a virtual power purchase agreement (VPPA). Now you’re wondering if you need an advisor to help you navigate the procurement process. Experienced advisors can help you avoid many of the pitfalls inherent in participating in the wholesale energy market. But how much do they—and should they—charge for the value they offer clients?

A trusted advisor can add significant value, helping with everything from building stakeholder support, navigating derivative accounting concerns, to running financial analyses and leading contract negotiations. The market for advisors offering their services has grown along with the appetite by corporate buyers for VPPAs. But clients’ understanding of advisory services costs under the widely accepted success fee model remains murky. Peeling back the layers of this business model can add greater clarity and transparency to the market.

The success fee model is the most common pricing model currently offered by renewable energy advisors. This model is akin to commodity brokerage services: advisory services are provided to the buyer “free” of charge because the seller “covers” the cost. In the case of a VPPA, the advisor provides support throughout the term of the engagement at no cost to the client and then receives payment at contract signing (or other key milestones) from the project developer. This fee can take the form of a payment based on project size (dollars per MW), an ongoing royalty (percentage of the long-term revenue from the project) or a combination of the two. In this scenario, a client avoids paying consulting fees in favor of ongoing payments levied on top of the VPPA price, paid over the life of the offtake agreement.

The success fee model has emerged as a favored pricing structure for good reason. Many VPPA initiatives are led by budget-constrained departments that have climate change or renewable energy goals, while the ongoing VPPA costs will be paid out of a larger facilities, operations, or treasury budget. In addition, even if a client fully intends to execute a deal, they can walk away with no money out-of-pocket if they decide not to execute a contract or if they are unable to find a project that meets their requirements. The success fee approach also helps ensure that the advisor works diligently to overcome any obstacles to bring the client an acceptable project and contract—or else they won’t get paid!

Unfortunately, this model can also create a misalignment of incentives. The advisor gets paid more for a longer term, larger sized and/or higher priced deal. Even though the advisory services required (i.e. stakeholder engagement, solicitation and contract analyses and negotiation) are the same whether the VPPA is for 10 MW or 200 MW, the advisor’s fees can increase materially for the latter. Additionally, since the advisor only gets paid if a contract is executed, this model can cause the advisor to focus more on getting a contract signed than on the nuances of the client’s best interests. This is a natural, human response to the incentives in place. Whether these potential conflicts are perceived or real does not diminish their impact on the client and points to the importance of trust and transparency in this relationship.

The chart below shows the fees which result from representative success fee engagements. As highlighted in the chart, seemingly modest differences in a VPPA can have a dramatic impact on the fees paid to the advisor. The chart assumes a simple combination success fee: $10,000 per MW paid upon contract execution and a 1% annual royalty from the developer’s VPPA revenue.

 

*All examples assume a 15-year contract; solar projects assume 25% net capacity factor (NCF) and wind projects assume 45% NCF

As these examples show, a simple change in technology from solar to wind, with a higher capacity factor, can significantly increase the payment to the advisor. VPPA advisory services can be highly lucrative, hence the reason why several advisors have been acquired by large energy companies.

It’s important to evaluate these fees in the context of cost and risk to the advisor. Typical time and materials VPPA advisory services that include stakeholder engagement, solicitation, analyses, negotiation, approval and execution of a VPPA may cost a buyer approximately $250,000 to $400,000. Even taking time-value of money into account, success fees come at a premium.  Whether the premium is excessive in light of the ‘at risk’ nature of the services can only be determined by the client.

In addition to the potential misalignment that this fee structure creates, there are some other aspects of advisory offerings that deserve greater transparency. The royalty component of the success fee model is often marketed by the advisor as sharing project risk with the client because they are to be paid out over time by the developer. In reality, some advisors are paid in a single, upfront lump sum payment by the developer (based on expected project revenue) or by syndicating those royalty streams—thus, the advisor can buy their way out of project risk. Also, agreements between advisors and developers may include non-circumvent clauses which prevent the developer from working directly with that client and/or prevent the client from engaging in a subsequent VPPA, without paying the advisor—whether they provide support for that transaction or not. Finally, some advisors exclusively source projects from their proprietary project database. The databases are often “pay-to-play,” resulting in some developers reducing the number of projects they make available via the database, thus limiting the client’s true access to the marketplace.

While there is no doubt that advisors are an important part of the corporate renewable energy ecosystem, corporate buyers should understand the true cost of these services under a variety of scenarios and weigh their corresponding value.

So are success fees a bad idea? Not necessarily.

If you have full insight on the range of potential fees and believe you are receiving equivalent value, then a success fee can serve you well. However, it is important that you have a clear-eyed view of the advisor’s incentive structure.

You can push for full transparency by asking the following questions during the hiring process (or even asking your current advisor):

  • What are your total potential fees (not just percentage of VPPA price or $/MWh) for a specific sized VPPA and what assumptions make up those fees?
  • Will you show me the VPPA financial results both with and without the advisor’s fee embedded in the price?
  • When will you be paid by the developer and will you tell me if these milestone payments change?
  • Is there a cap on the total success fee amount? If not, why not?
  • What contract terms do you require between you and the chosen developer and how could those terms impact me now and into the future?
  • Will you provide advisory services on fixed-fee or time and materials basis and if so, what are the estimated costs for those services?

As an advisory firm that supports renewable energy procurement and offers a success fee model along with other payment structures to our clients, 3Degrees welcome these questions. We believe transparency creates a more efficient marketplace, enables educated buyers and improves decision making. Increased transparency naturally occurs in maturing markets, but further clarity is needed to ensure that cost equals value—with the value to be defined by you, the buyer. Advisors in the sustainability industry need to foster sustainable pricing models that serve the clients, fairly compensate the advisors and ultimately, promote more renewable energy being built to combat climate change.

Interested in learning more? Get in touch with us. Contact Us Here