Month: July 2019

Reducing Scope 2 GHG Emissions at Home and Abroad

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Businesses across the globe are increasing their efforts to reduce their carbon footprints. For many, it’s clear how to do this in their home country, but less so when they try to reduce emissions associated with their overseas operations. 

3Degrees recently released a white paper that explains some of the most common international options, where each option is available, and how to ensure that investments follow the WRI Greenhouse Gas Protocols.

The white paper covers topics such as:

  • Methods for calculating Scope 2 emissions
  • Reducing global emissions
  • Quality criteria for Scope 2 emissions reductions

Want to learn more? Check out our white paper.

 

Pathways to a Successful Renewable Energy Aggregation – Part 2

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Building an Effective Renewable Energy Aggregation Team

Last month, in the first post for our renewable energy aggregation blog series, we discussed how companies interested in convening an aggregation can get started.  Here, we talk about the follow-up question that immediately arises: what kinds of companies make good aggregation teammates? In particular, clients ask “Do we need a large buyer alongside us?  Or actually, do we even want one?”

The short answer is that there are lots of ways to build a great aggregation team. There isn’t any one prescription or “must have.” Nonetheless, there are a number of factors which can make an aggregation team more effective for its participants.  In this article — the second in our series — we take a deeper look at who’s around the table and what makes for a great aggregated procurement team.

Experienced vs. Inexperienced Buyers

Not surprisingly, it can be helpful to have companies who have taken part in previous energy transactions alongside those who are new to the process. Perhaps less obviously, the benefits flow in both directions. For example, experienced buyers may lend credence to the aggregated procurement simply by being part of it; their participation can be helpful to new buyers’ securing internal approval to join the effort.  By contrast, the ability to draw in less-experienced companies can create an industry leadership role for the experienced buyer; or may enable the experienced buyer to facilitate bona fide emission reductions in its value chain.

More practically, throughout the transaction process, we find that all companies bring relevant experience and insight to the table – it’s not limited to or exclusively created by a company’s previous experience with a similar transaction type.  Larger company representatives learn about the particular challenges and sensitivities of smaller companies and what drives their decision making; small companies lean on their larger counterpart’s specialized expertise in accounting, finance, and legal nuances to complement their own.

On the flip side, experienced buyers may sacrifice speed-to-completion when participating in an aggregation, as compared to an effort to more simply replicate an earlier transaction success. First-time buyers might find experienced buyers comparatively inflexible around agreement terms which have become “standard” in their organization. The benefits of aggregation – for example, the ability to build a portfolio of smaller or more geographically diverse renewable energy supply projects – should be weighed against such challenges.

Offtake Amount Flexibility

Offtake quantity is another area where it’s helpful for an aggregation team to have some amount of flexibility and/or a diverse set of needs.  An aggregation begins with companies seeking enough renewable energy to contribute in a meaningful way to the financial viability of a new project – so the total amount is certainly relevant.  But the amounts required by each participant, and any flexibility in those amounts, can also help aggregation teams secure good projects and terms. In any procurement, there is some degree of chicken-and-egg – you don’t know how much you’ll want (if any) until there’s a bona fide offer with key terms settled, and developers don’t want to put bona fide offers on the table until they know how large an offtake is at stake, how many contracts it will require, and with whom. Having buyers with some flexibility in their needs allows everyone to make adjustments as the process moves along, based on the specifics at hand.

In our aggregated work to date, we’ve had companies increase and decrease their offtake amounts over the course of the project.  We’ve had companies emerge unexpectedly as “anchor tenants” because the procurement resulted in unexpectedly interesting opportunities.  We’ve had companies who’ve stepped aside as their renewable supply strategy matured in other directions. Having team members with flexibility in their offtake requirements is helpful in creating a process that’s forgiving and nimble.

Credit Worthiness

Creating a “financeable” purchase agreement is a critical factor in any renewable energy supply arrangement that seeks to bring new projects to the grid. Offtaker creditworthiness is a key consideration.

Project equity and debt providers need to be satisfied that an offtake agreement will be fulfilled in all its particulars across its term before they agree to finance a project. Most commonly, they look to offtaker long-term debt ratings as a key indicator of sufficiency for offtake finance.  However, many corporate offtakers don’t present as exemplary, highly-rated counterparties. They may be privately held without public financials; they may be debt-free and hence unrated; they may be large and stable but carry a relatively unfavorable credit rating due to macro issues in their industry; they may be newly constituted, or they may have steadfast corporate views of their viability as a transaction partner which differ from that of their counterparty.

We have yet to serve a client whose creditworthiness presented an insurmountable issue to completing a procurement, but we have served clients whose needs were thorny and took time to navigate.  An aggregation team will benefit from having some companies whose financial standing is straightforward and uncomplicated sitting at the table.

 While the good credit of one company does not compensate for the poor credit of another, developers are more willing to work through thorny issues with a particular offtaker if that effort unlocks a large offtake from an aggregated team.  By contrast, a developer may be less favorably inclined to work through thorny issues with four or five offtakers, each relatively small, and each presenting different needs for exceptions or extensive diligence. This reluctance may take the form of fewer project offers, or less favorable commercial terms.

Large Buyer – Yes or No?

Now we have come full circle to our original question:  Do renewable energy aggregations need a large buyer (also known as an “anchor tenant”)? As stated at the beginning of the article, the answer is “no” – large buyers are not critical to a successful aggregation.

That said, there are advantages to having a large offtaker.  Large offtakes can bring price advantages and other negotiating leverage. Worthy of mention is the power dynamic which a large offtaker may create. If smaller buyers feel they need to defer to the large offtaker in decisions on projects or terms, it may cause a less-perfect result for that buyer. That too, is part of the equation: if a small buyer has limited decision authority on a team due to the presence of a larger offtaker, that small buyer has a less complicated package to bring to their internal stakeholders for approval – for some buyers, this lack of flexibility can increase speed and enhance the likelihood of reaching a successful conclusion.

There is not just one way to be successful in convening an aggregated procurement.

Aggregation is a viable option for many companies and varieties of teaming. I am inspired by the interest in renewable energy aggregation and look forward to bringing additional teams to the finish line. 

Navigating the Opportunities and Pitfalls of International Renewable Energy Markets

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Recently, 3Degrees hosted a CDP webinar with two of our clients, Sia Xeros, Environmental Sustainability Lead at Mastercard, and Pat McLaughlin, Sr. Vice President of Corporate Social Responsibility at Verisk, to discuss their experiences with international renewable energy markets. Both of these organizations have demonstrated climate leadership, achieved important firsts, and report to CDP on their progress.

We had an engaging discussion with these two partners, as they shared how they have successfully navigated through some common international market challenges to meet their goals. If you were not able to join us live, you can find the recording here. In the meantime, here’s a quick summary of a few of the key takeaways.

Addressing energy loads on an international scale is complex

Mastercard has 133 offices in 79 countries and Verisk has offices in 30 countries. While the lion’s share of their electricity consumption occurs in a few locations, they need options for addressing the significant number of countries with smaller loads to meet their corporate emissions reduction goals. In addition to geographically dispersed energy loads, another challenge shared by both companies is the large number of leased buildings. Without building ownership, the companies have fewer options for energy procurement, making it harder to address their global electricity consumption footprints.  

Considering the above challenges, both Mastercard and Verisk noted that the proliferation of energy attribute certificate (EAC) markets across the globe has allowed them to take immediate action to address their global energy footprint.

It’s critical to understand the nuances of in-country product options

Understanding which EACs are available in each region is a critical part of the puzzle. The options vary quite a bit between the U.S., U.K, Australia, Japan, Morocco, and Kazakhstan (just to name a few of the countries where our webinar guests have operations). While all EACs convey the environmental attributes of one megawatt-hour (MWh) of renewable electricity generated, there are important differences across products and national markets that can affect claims, impact, and availability. For instance, while the North American Renewable Energy Certificate (REC) and European Guarantees of Origin (GOs) markets were created over a decade ago by governmental entities, I-RECs and TIGRs are relatively new markets that were created by non-governmental entities in collaboration with key stakeholders in each country. Understanding regulatory and market dynamics is critical to successfully navigating the international landscape. 

Another factor to consider is the range of generation and other non-energy attributes included in any EAC.  There are many ways to differentiate product purchasing and support renewable energy projects with specific characteristics. Mastercard and Verisk created a purchasing framework and then used it to make decisions that balance the products available (e.g. project location, technology, commercial operation date) with reporting needs (e.g. CDP, RE100, SBTi) and external factors (e.g. country-specific regulatory constraints).

Companies often express how overwhelming it can be to manage and assess purchasing options across many international markets, especially since regulatory and market conditions are constantly evolving.  Both of our webinar guests highlighted how it can be helpful to partner with an expert who can guide companies through this process, including evaluating each country’s policies to ensure the product meets the quality criteria required for Scope 2 accounting and understand opportunities for impactful purchasing across multiple markets.

Internal goals and stakeholders play an important role

Since 2017, Mastercard has had a goal of 100% renewable energy across all of its global offices and was the first payments industry company to achieve this recognition.

“We have set a 100% renewable energy goal and we continue to hit it every year. We work with them [3Degrees] to find the best country specific methods we could.” Sia Xeros, Mastercard

And the company continues to focus on incremental progress every year, evolving its purchasing strategy to take advantage of new in-country options that have become available.

While setting internal goals is the first step, communicating these actions and the progress on the goals is just as importantBoth Mastercard and Verisk communicate their progress through their global environmental, social and governance (ESG) reporting. 

Additionally, the 8,800 employees at Verisk have been a significant driver for action. In 2017, Verisk’s investments in EACs and carbon offsets helped them become carbon-neutral. Pat McLaughlin explained, “We’ve used this as an opportunity to get our people fairly engaged on the topic.  They know that our investments are spread around the countries where our teams are actually doing business and, in most cases, where they live. We’re able to select certain projects that our employees can identify with. It is an opportunity to bring people together.” 

It was a pleasure to serve as the moderator for this webinar and listen to these two corporate leaders in sustainability share their approach to international renewable energy markets. As we heard from both Mastercard and Verisk, a commitment to global renewable energy usage does not come without challenges – but these challenges are not insurmountable, as evidenced by the success of both of these companies. If your organization is considering renewable energy options for your global operations and is interested in the guidance of an experienced partner to help you navigate your options, then I’d love to hear from you.

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