Author: 3Degrees Staff

At 3Degrees, we make it possible for businesses and their customers to take urgent action on climate change— providing renewable energy and carbon offset solutions to Fortune 500 companies, utilities, universities, green building firms and other organizations that are working to make their operations more sustainable. And as a certified B Corporation and eight-time winner of the EPA Green Power Supplier of the Year award, we’re primed to deliver custom clean power solutions that will help each organization make an environmental impact. Founded in 2007, 3Degrees is headquartered in San Francisco, California, with offices across the United States.

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 long-term 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 short-term, 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.

Lyft set an aggressive goal – to offset emissions from all Lyft rides worldwide. In its initial engagement, Lyft wanted to be intentional about the projects in which they supported, 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

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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. Lyft’s initial investment used 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 also supported projects that help address other environmental impacts from vehicle use, such as water and non-GHG air pollutants.

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

  • Environmental integrity was 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 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 played a major role in the project portfolio. Initially, this included 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 supported one-of-a-kind projects in the transportation sector that have a demonstrated impact and the potential for scalability . This enabled 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.

“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 from initial effort:

  • In 2018, Lyft offset the emissions from all rides across the globe. This included 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 was one of the largest in the U.S. and among the top 10 in the world.
  • All offset projects were 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 funded emission reductions in the transportation sector from projects that are catalyzing change in the industry.

Lyft Initial Results graphic

 


 Project Spotlight

Carbon offsets lead to real change in automotive manufacturing process

The Meridian Magnesium project was the largest component of Lyft’s initial portfolio. Located just outside of one of Lyft’s major markets, Meridian manufactures magnesium-based automotive parts that reduce emissions during the manufacturing process and help lightweight vehicles and improve vehicle fuel efficiency.

Lyft’s support helped 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

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

PPA vs VPPA: similarities and differences

Power purchase agreements (PPAs) and virtual power purchase agreements (VPPAs) have been around for a while. But it can be hard to remember the differences between the two. This infographic provides an overview of the major differences. Need more depth? Check out our article, “Renewable energy power purchase agreements.” 

Want more information? Take a look at our energy and climate consulting services, our content related to renewable energy procurement or contact us.

 

The do’s and don’ts of marketing your renewable energy purchase

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For a variety of reasons, companies are increasingly buying renewable energy as a way to reduce their carbon footprint. After making this investment, many companies want to share the news of their environmental commitment with interesting stakeholders including customers, employees, investors, and environmental organizations. Done well this can help a company improve employee and customer satisfaction, garner positive press and enhance their brand value. Done poorly, a company runs the risk of brand damage, accusations of greenwashing, and may be subject to fines if in violation of federal or local regulation.

This white paper shows you how to avoid those pitfalls and provides clear, concise guidance to all organizations that want to accurately communicate their actions to support renewable energy.

Download the white paper to learn:

  • What is an environmental claim?
  • Who regulates market claims around renewable energy?
  • Guidelines for making an accurate claim.
  • Examples of potentially troublesome marketing claims.
  • Common areas of confusion.

The source of this white paper is a webinar series for the EDF Climate Corps fellows.  EDF Climate Corps is a summer fellowship program that embeds trained graduate students inside leading organizations to accelerate clean energy projects. We thank EDF for allowing us to share this content with a wider audience. 

Learn more about renewable energy certificates and power purchase agreements.

Or contact us.

Dempsey Ridge: Wind Farm Project

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Dempsey Ridge: wind energy farm

The Dempsey Ridge wind project is located in Beckham and Roger Mills counties, in western Oklahoma, approximately 10 miles southwest of Cheyenne. The wind energy farm sits on over 7,500 acres of agricultural and grazing land. The project has a capacity of 132 MW, consisting of 66 wind turbines.

This project is also known as the “Big Smile” wind farm, named after an employee of the project developer who lost a battle with cancer.  

Environmental and Social Benefits

The Dempsey Ridge Wind Farm provides a number of environmental and social benefits to its community and the larger region. First, the project provides enough clean energy to power 46,000 homes. Further, each year, this renewable wind energy source saves the planet from nearly 339, 000 metric tons of carbon dioxide.

The Wind Farm also created over 150 temporary jobs during construction and the on-going operation of the wind farm has created 13 new full-time, skilled local jobs. The project will generate more than $20 million in tax revenue for Roger Mills County and will provide supplemental income to participating agricultural landowners through its 99 lease agreements.

3Degrees + carbon offsets

Learn more about renewable energy certificates or to view other project profiles

Or contact us.

Scenic View Dairy: Methane Digester Project

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Scenic View Dairy: methane digester project

The Scenic View Dairy has been operating since 1985. Owned by Brian Geerlings, this farm, which is located about an hour from Grand Rapids, Michigan, is home to approximately 2,200 milking cows, 1,500 heifers and 10,000 grow-finish swine. Prior to the digester project, as on many other farms, the manure at this facility was stored in an open lagoon and field-applied seasonally. Manure decomposes anaerobically in open lagoons, resulting in large amounts of methane gas, a very potent greenhouse gas.

With the dairy methane digester in place, manure is now taken from the barns and gravity-fed to the digesters where the methane is captured and used for energy production. The potential sale of carbon offsets helped make the Scenic View methane digester system financially feasible. The digester system was installed and first came online in June 2006. Scenic View Dairy was the first commercial facility in North America to generate both pipeline-grade methane and electricity from animal waste.

Environmental and Social Benefits

The methane produced from this system is utilized to generate electricity for on-farm use. Excess power is sold to the power grid for the use of the community.

Other benefits of the system include: utilizing the separated solids as animal bedding, reducing the odor of the effluent, and producing sustainable energy for the farm and local community (600 homes). The farm is also saving money on heating costs, bedding costs, and solids disposal.

For more info on Scenic View, check out this video.

3Degrees + carbon offsets

Learn more about renewable energy certificates or to view other project profiles

Or contact us.

Climate change year in review 2017

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2017 was a year of climate advances and set backs. Check out our infographic for some of our favorite (and least favorite) headlines.


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Read what other businesses are doing to address climate change.

Insights from European sustainability conferences

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3Degrees has been spanning the globe in recent weeks to connect with organizations that are at the forefront of sustainability and climate change action.

We attended several conferences across Europe and wanted to share some of our key takeaways and common themes that we have been hearing.

We attended the following conferences:

  • Sustainable Aviation Summit, October 3-5, Geneva
  • Companies vs Climate Change, October 4-6, Brussels
  • Responsible Supply Chain Summit, October 17-18, London

Here is what we heard:

  • Supply chain is seen as the next area of opportunity. At both the Supply Chain Summit (obviously) and at Companies vs Climate Change, there was a clear recognition that Scope 3 (supply chain) emissions are the most challenging to address. While more companies are reporting, training, and auditing, there was a lot of interest in implementing initiatives that achieve measurable results. We have seen this desire for ideas on how to make real progress from both clients and prospects. As a result, we have partnered with CDP, Smithfield Foods, and Akamai on a webinar focused on concrete actions that can be taken today around supply chain emissions. The webinar is October 26, but if you miss it, you can can still get a copy of the recording.  
  • European firms are very focused on Sustainable Development Goals. One of our key takeaways from all of these conferences is how central Sustainable Development Goals (SDGs) are for European companies – in a way that is not the case for most U.S. based companies as of yet. As a reminder, SDGs are a set of 17 goals, created by the United Nations in 2015, that tackle a range of issues from hunger, to gender inequality, to climate change. Many companies are using these goals as a guidepost for their sustainability strategies. 
  • Carbon offsets are a hot topic. At both the Aviation Summit and Companies vs Climate Change there was a lot of talk about carbon projects. By and large, the companies that were investing in carbon offsets were focused on projects that support communities in the developing world and offer storytelling opportunities. An open question remains on if there will be enough charismatic projects to meet demand when the airline industry carbon offset requirements go in effect (voluntary starting in 2021, required after 2026). This is something that our own carbon markets team is working on as they look to bring more boutique projects into our portfolio.

Overall, across all the conferences, it became clear that European companies are very focused on carbon neutrality (as opposed to just a percent emission reduction) and the opportunities this creates for improvements in their operations and supply chains. This momentum in Europe should drive companies in other parts of the world to become fast followers, learning from their counterparts on how to make material progress on climate change.