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.

Reflections from Renewable Energy Markets 2018

REM 2018 renewable energy markets

Co-Authored by:  Amanda Mortlock, VP of Utility Partnerships, and Scott Eidson, VP of Environmental Markets

The annual Renewable Energy Markets conference was held recently in Houston, TX.  As usual, 3Degrees made a strong showing, with four of our team members participating on panels this year and several more in attendance.  REM always delivers an action-packed agenda filled with updates on industry trends and innovative programs from both the utility and corporate leaders in the room, as well as a fantastic opportunity to catch up with colleagues from across the country – and this year was no different.

REM covers a wide variety of interesting content in the two-day conference and it’s impossible to attend every session or provide a comprehensive recap. But our team divided and conquered throughout the event and then collected a few of our top takeaways. Here are the 3Degrees’ highlights:

The landscape in utility-offered voluntary renewable energy programs is shifting and igniting much discussion about how to grow and increase the relevance of these programs.

  • In states with high or increasing Renewable Portfolio Standards (RPS), utilities and regulators are wondering what a more renewable basic service means for voluntary renewable energy programs but customer preference is clear: customers want a voluntary means of driving demand for high-quality renewable energy.  Silicon Valley Power led an excellent roundtable talking about how they leveraged market research to make minor changes to their green power program as they moved their residential product to a 100% carbon free offering.
  • Utilities who are maximizing the value of their renewables programs are focused on both product design and successful marketing strategies.  Products are increasingly more complex in part to take into account the unique needs of each customer segment or even individual customers. Xcel Energy shared insights from their product design efforts, which led to one of the most successful and accessible green tariffs in the country, RenewableConnect.  Presenters at the Utility of the Future is Here session discussed trends in program marketing and customer acquisition ranging from digital channels and online marketplaces to new methods of leveraging call centers and strategies for small business outreach.  The bottom line: successful programs require good foundations and regular evolutions when it comes to both product design and marketing.

A few key emerging trends in corporate renewable energy procurement are helping to drive expansion across a range of sizes of customers.

  • At the top of the discussion list:  aggregation. The market is showing an increased appetite for aggregation, such as the deal that 3Degrees recently facilitated in the PJM energy market. There is a lot of enthusiasm for this model since it can help bring buyers with smaller energy loads into the mix; however, aggregation is still very new and there is a lot of room for refinement and simplification of the process.
  • In addition to aggregation, PPAs, VPPAs and RECs all very much play a continued role in corporate buyers’ renewable energy strategies.

In the fight against climate change, Scope 1 emissions are increasingly in focus with opportunities for both electric & gas utilities, as well as corporates looking to address their fleet emissions.

  • With the success and growth of renewables leading the way, many utilities, companies, and consumers are now considering how they can have a meaningful impact on their scope 1 emissions — enter electric vehicles and renewable natural gas.   Both are compelling in terms of potential climate benefits and each offers an opportunity for electric or gas utilities to create new and impactful offerings for customers that align with the utility’s long-term interests as well.

What’s the role of policy and voluntary markets?

  • As policies for renewable energy increase and carbon policies are introduced, states need to think carefully about how to ensure these policies do not constrain private investments in renewable energy.
  • Companies continue to be driven by desires to support renewable energy faster than state policies are increasing.

While these are the discussion trends that stood out to our team the most this year, there were so many other interesting topics explored during the conference – it was hard to pick just a few!  And the hands-down winner of REM this year? Houston Mayor Sylvester Turner, talking about his Green Houston initiative, his involvement with the Climate Mayors, and the very personal way climate change has impacted his beloved city.  He was absolutely fantastic.

Thanks for a great time, Houston – and we’ll look forward to seeing all of our REM colleagues in San Diego next year!

FAQs: LCFS

Answers to your LCFS FAQs

Get your questions about LCFS answered here. Check back frequently for updates. Have a question that you need answered? Contact us.

Frequently Asked Questions:

  1. What is the Low Carbon Fuel Standard (LCFS)? 
  2. What is an LCFS credit?
  3. What kinds of vehicles can generate credits?  
  4. How much value can I get from the program?
  5. How do you make money through the LCFS? 
  6. Do projects need to be located in California to be eligible?
  7. Are there requirements on how the revenue from selling LCFS credits is spent?
  8. What kind of fuels can generate credits?
  9. How do you get the most out of the LCFS?

Q: What is the Low Carbon Fuel Standard (LCFS)? 

A: The California LCFS is a statewide market-based policy with the goal of decarbonizing California’s transportation fuel mix. The policy requires “deficit generators” — providers of petroleum-based fuels — to purchase credits from “credit generators” — companies utilizing low carbon fuels like electricity, renewable natural gas (RNG) or renewable diesel. Many transportation-related programs are interested in how efficient a vehicle is, but the LCFS focuses on how “clean” the fuels are that are powering those vehicles and focuses on reducing the carbon intensity, or the emissions per unit of energy, of those fuels. 

Q: What is an LCFS credit? 

A: An LCFS credit represents a metric tonne reduction in GHG emissions. Electric charging and the use of other low carbon fuels are eligible to generate these credits. Fuel producers and importers are required to purchase these credits to offset the carbon intensive fuels they supply.

Q: What kinds of vehicles can generate credits?  

A: There are a wide variety of vehicle and fuel applications that can generate credits. Any vehicle that could be using fossil fuels but is instead using a fuel with lower emissions can generate credits. Examples of electrified vehicle credit generation opportunities include:

  • Battery electric and hydrogen fuel cell electric forklifts
  • Passenger Cars via EV campus charging and public DC Fast Charging
  • Electric buses and shuttles
  • Electric Yard trucks/tractors and other off road cargo handling equipment
  • Electric cargo handling equipment
  • Electric cargo and delivery vans and box trucks
  • Battery and hydrogen fuel cell electric medium and heavy duty trucks and tractors
  •  Shore powered refrigerated trailers run on electricity

3Degrees offers a free assessment to help organizations identify all eligible crediting opportunities based on their unique operations. Reach out to our team here to see if your equipment qualifies.

Q: How much value can I get from the program?   

A: LCFS credit generation varies based on vehicle type, fuel source, and credit value. During our free assessment phase, 3Degrees can help you evaluate the expected value that your organization is entitled to based on your equipment inventory and historical (or projected) charging data.

Q: How do you make money through the LCFS?   

A: LCFS credits are earned per metric ton of avoided emissions, and the monetary value of the credits varies based on supply and demand of the credit market. 3Degrees’ clients benefit from our unparalleled trading expertise and network developed over 15 years as an environmental commodities leader to ensure credits are monetized quickly and revenues are maximized. We assume all credit aggregation and monetization activities (e.g., marketing, sale, contracting, settlement, etc.) and remit proceeds directly to our partners.

Q: Do projects need to be located in California to be eligible?   

A: The LCFS program applies to any transportation fuel that is sold, supplied, or offered for sale in California. However, other states have similar market-based incentive programs that allow credits to be generated via use of low carbon fuels. Oregon has an active program (Clean Fuels Program) as does British Columbia. Washington and the entire country of Canada are expected to launch programs beginning in 2023. 3Degrees participates in all active markets on behalf of its clients and closely tracks other programs launching soon to ensure our clients benefit as soon as they come online.

Q: Are there requirements on how the revenue from selling LCFS credits is spent?   

A: LCFS revenue generated from EV charging must be spent to further benefit vehicle electrification, but the regulation is purposely broad to allow flexibility in how the money is spent. For example, revenues can be used to offset costs from EV purchases and maintenance, charging infrastructure purchases and maintenance, electricity costs, and marketing or education on the benefits of electric transportation. T LCFS credits are also bankable, meaning they don’t have to be sold or used immediately.

*Electric forklifts are not currently required to meet these LCFS credit spend requirements.  

Q: What kind of fuels can generate credits?  

A: The LCFS is greatly reducing the total cost of ownership of electric vehicles. Electric vehicle charging using renewable electricity generates credits at the highest rate, but even electric charging using standard grid electricity creates a strong financial return. Other low-CI fuels generating credits include low-CI hydrogen, ethanol, biodiesel, renewable diesel, compressed natural gas and biogas (CNG), and liquefied natural gas and biogas (LNG).

3Degrees specializes in helping our partners maximize value available through the program for the use of electricity and low-CI hydrogen, as well as helping owners of public charging and hydrogen fueling infrastructure generate and sell credits.

Q: How do you get the most out of the LCFS?

A: For EV charging, using high value renewable energy certificates can significantly increase LCFS revenues. 3Degrees supplies eligible green power and works with each partner to come up with the optimal long-term sourcing strategy. Lower carbon intensive power can also come from onsite renewable sources, like solar panels, and 3Degrees helps our partners leverage those resources when applicable.

Another key component of maximizing LCFS value is aggregating credits. Entities generating a small number of credits may need to take a price discount in the market because the standard transaction size is thousands of credits. Working with a partner like 3Degrees can improve selling power and ensure maximum credit revenue is realized quickly.

FAQs: PPA and VPPA

solar panels representing PPAs and VPPAs

Answers to your PPA and VPPA FAQs

Get your most questions about PPAs and VPPAs answered here. Check back frequently for updates. Have a question that you need answered? Contact us.

Frequently Asked Questions:

  1. Why are so many companies signing power purchase agreements (PPAs)?
  2. What is a power purchase agreement (PPA) and how does a PPA work?
  3. What is a virtual power purchase agreement (VPPA) and how does a VPPA work?

Q: Why are so many companies signing power purchase agreements (PPAs)?

A: Over the last 3 years, corporations have signed approximately 7 GW of either virtual or physical PPAs in order to offset their scope 2 emissions, support a de-carbonized grid, take advantage of all-time low costs of renewable energy and capture the value of declining tax benefits. Most of these early movers used a well-proven structure (called a “contract for differences”) to enable them to gain economies of scale by signing large volumes from wind or solar projects in a financially optimal part of the country and then using those RECs to offset their load elsewhere. These long-term corporate contracts were directly responsible for enabling the financing of these renewable energy assets, thus also giving corporates the ability to prove their commitment to tackling climate change.  

Q: What is a power purchase agreement (PPA)? How does a physical PPA work?

A: A power purchase agreement (PPA) is a contract between two parties where one party (usually a renewable energy project developer) sells both electricity and renewable energy certificates (RECs) to another party (the buyer, sometimes called the offtaker). PPAs are a good mechanism for companies to make a long-term commitment to purchasing renewable energy.

Traditionally, the most common type of PPA has been the physical PPA. This type of contract is used most often by utilities for their energy procurement but a few experienced companies have also utilized this structure.

A physical PPA is structured as follows:

  • In order to participate in a physical PPA, both the buyer and the seller must obtain a license through the Federal Energy Regulatory Commission (FERC).
  • The seller (e.g. the project developer) builds, owns and operates the renewable energy project and sells the project generation and corresponding RECs as the revenue source to finance the construction of the project.
  • The buyer purchases the energy and RECs as they are generated by the project.
  • The buyer takes legal title to the energy and the RECs at a delivery point agreed upon by the parties, either the project busbar or a nearby trading hub.
  • After the buyer takes title to the energy, it is responsible for the management of the energy – moving and scheduling the energy to its load or selling it into the wholesale power market. In addition to the aforementioned FERC license, this also requires forecasting of the project generation, the company’s load and scheduling experience. Some companies elect to use a third-party service provider for scheduling.

Companies that have elected to pursue physical PPAs typically are highly experienced energy buyers and have large, geographically-consolidated electricity load. They prefer to actively manage their energy supply and demand in parallel with meeting their renewable energy goals.

For more information on how PPAs and VPPAs work, see our article Renewable Energy Power Purchase Agreements

Q: What is a virtual power purchase agreement (VPPA)? How does a VPPA work?

A: A VPPA is a specific type of a PPA contract, used to procure long-term renewable energy. Unlike a physical PPA, with a VPPA the buyer does not receive, nor take legal title to the energy and thus the “virtual” moniker. The buyer continues to receive physical power from its utility or retail provider, allowing the buyer to utilize a VPPA in a different region than where it uses electricity.

In a VPPA (also sometimes called a “contract for differences”), a buyer pays a fixed price to the seller for the project’s generation and associated RECs. Instead of taking title to the power from the facility, which requires a FERC license and scheduling expertise, the energy is liquidated into the wholesale power market by the seller. When the energy is sold into the wholesale power market, it receives the corresponding floating market price and this revenue is passed through to the buyer.

More specifically, a VPPA is structured as follows:

  • Similar to a physical PPA, the seller in a VPPA is typically a renewable energy project developer who builds, owns and operates the project. The fixed PPA price it receives from the buyer under the VPPA is the revenue source used to finance the construction of the project.
  • The buyer agrees to pay the seller a fixed price for every MWh renewable energy generated by the project. This fixed PPA price is the guaranteed price the developer will receive for its project.
  • The project developer (or its agent) is responsible for selling the project output into the wholesale power market, receiving a market price on the agreed upon delivery point – either the project node or a nearby trading hub.
  • The “contract for differences” settlement is a comparison between the fixed price and the floating market price. When the market price exceeds the fixed VPPA price, the developer passes the positive difference to the buyer. When the converse is true – the market price is below the fixed VPPA price ‒ the buyer pays the developer the difference.
  • The buyer retains all of the RECs associated with the generated energy purchased under the VPPA.

For more information on how PPAs and VPPAs work, see our article Renewable Energy Power Purchase Agreements.

VPPAs: Four surprises for first time buyers

Desks-with-wind-turbines

Power purchase agreements (PPAs) – and virtual power purchase agreements (VPPAs) in particular – have become a popular and valuable way for companies to meet renewable energy and greenhouse gas (GHG) reduction goals. As many of our clients have experienced, there is a significant learning curve that comes with executing your first PPA–and one that should not be underestimated. 3Degrees has helped a number of organizations execute their first PPA or VPPA and have found that many of them are surprised by or unaware of certain key components for success.

Four important keys to success are:

  1. Advisor selection
  2. Defining the value of a PPA to your organization
  3. Stakeholder education and engagement
  4. Understanding that price and value are not the same

This article provides advice on how to successfully address each of these common stumbling blocks. If you are looking to execute your first deal, understanding and carefully thinking through these areas ahead of time will help ensure you have a smooth PPA procurement and implementation process.

subject-one

1. Advisor selection: be skeptical of deals that sound too good

Some advisors pitch VPPAs as money makers with no upfront costs for your company. These claims should be viewed with skepticism and examined closely. We recommend the following considerations when you are evaluating and selecting an advisor:

  • Know how your advisor is getting paid. Some advisors are making windfall profits based on a success fee pricing model. With this model, the advisor receives payment from the project developer upon contract execution and the fee is based on the long-term project revenue ($/MWh) or the size of the selected project ($/MW). The buyer benefits by avoiding upfront costs but this method is more costly over the long term. As important, it can also create a misalignment of incentives–the advisor gets paid more with a longer term and/or a larger sized deal. See our article on VPPA transaction fees for more details on how to make an informed pick for your advisor.
  • Be cautious of easy money. VPPAs are sometimes advertised as positive cash flow for buyers–meaning that buyers will actually make money by entering into the contract. If a VPPA truly provided easy money, then we would expect to see project developers or investment bankers (who always follow the money) building projects on spec to reap the rewards. Ensure you understand the underlying modeling assumptions that result in a VPPA with positive net present value.
  • Don’t bank on increasing wholesale power prices. Natural gas prices, which are highly correlated to wholesale power prices, are at historic lows due to the shale gas boom. We see no sign of a slowdown in US natural gas production [Source: EIA Annual Energy Outlook 2018], so be wary of price forecasts that show significant increases in wholesale power prices over time (and therefore increase the potential value of a VPPA for a buyer).

reason-two

2. Defining the value: creating a PPA “mission statement”

When the sponsor of the PPA or VPPA initiative sits within the sustainability team, the “why” behind procuring renewable energy is often so obvious to them, it goes unsaid. Consequently, they may be surprised when they face resistance from others in the organization. For example, a facility manager might be more focused on keeping the electricity bill low. Or an energy buyer might view renewable energy as an unnecessary and frivolous use of company resources. Or maybe the company attorney resists dedicating time to learning a new contract structure.

Stakeholder engagement (more below) is a key part of working with these naysayers. But before launching stakeholder engagement activities, it is important to define why the company is heading down this path. Your PPA initiative needs a mission statement.

The mission (or purpose) of your PPA initiative provides the foundation for all internal and external discussions. For example, your company’s values may align with procuring renewable energy. There might be public goals that need to be met. Or you may be facing shareholder, customer or competitive pressure to act on climate change. Understanding and being able to explain why a PPA is well-suited to meet your needs provides the proper context for internal discussions.

In addition, a clearly defined purpose provides guiding principles for assessing the many trade-offs that come with the PPA selection process. Some common VPPA trade-offs include:

  • A project located in the same state as your corporate headquarters versus a project in a less expensive part of the country
  • The desire for additionality versus preference a shorter contract commitment
  • Executing a single transaction to meet goals versus multiple contracts to diversify risk

When a company has a clearly articulated mission for their PPA initiative, the answers to these questions become simpler and the best-fit PPA can readily emerge.

reason-3

3. Stakeholder engagement: ignore at your peril

PPAs are complex contracts that require significant buy-in from across the organization. You will be introducing people to a lot of new concepts – concepts that are typically not part of the organization’s core business and outside people’s comfort zone. This leaves many stakeholders feeling uncertain and afraid to ask a “stupid” question. As a result, we’ve seen stakeholders avoid asking questions and internal deal champions that assume this lack of questions equals support for moving forward with a PPA. Unfortunately, the silence is often indicative of continued confusion and can create last minute project roadblocks.

So how do you get meaningful engagement with your stakeholders (and avoid unpleasant surprises later)?

  • Stakeholder mapping: Think carefully about all of the different departments that may be impacted by a PPA and/or may have decision-making authority. It can be useful to look at other major initiatives that required multi-departmental buy-in to ensure that a complete list is created.
  • Outreach: After the stakeholder map is complete, find the decision maker in each department. Build the relationship by telling them the renewable energy story, the PPA “mission statement” and the importance of their department’s role in the overall decision-making process.
  • Education: Renewable energy, wholesale power markets and the mechanics of the “contract-for-differences” are key topics for the stakeholder group to understand when pursuing a VPPA. These concepts are usually new to stakeholders and have very little to do with their day-to-day responsibilities. People do not need to be experts — that’s what advisors are for — but they do need to understand the value drivers and risks. Be very intentional about setting the tone for stakeholder meetings. Simple statements such as “we are all here to learn” and “please ask questions” can create an environment where real questions will emerge.
  • Follow-up: Individual follow-up goes a long way. This can be a simple email or a small group discussion on the specific topics that correspond to an individual and their role. This kind of targeted follow-up can create a comfortable environment for asking detailed questions, thus giving stakeholders the ability to confidently support your initiative.
  • Repeat: True stakeholder engagement requires building trust over the term of the PPA initiative. Stakeholders need to be given regular progress updates and provided with opportunities to ask further questions.

If you are working with an advisor, they should be able to provide some tools and resources to guide the stakeholder engagement process.

4. Evaluating offers: VPPA value is not just about price

We all like a good deal. There’s a reason why retailers run special promotions for items at $9.99 instead of $10 – we like paying the perceived “lower” price. So while our natural instinct is to select the lowest price, for VPPAs, the lowest price offer is often not the best value for the buyer.

Instead, consider: What is the long-term value of the VPPA for our company? And how can I ensure I’m making an apples-to-apples comparison between projects?

For example, how do you compare:

  • A wind project against a solar project given that these technologies have different generation profiles?
  • Projects with different start dates or different contract lengths?
  • Projects in different states or regions?

There are no simple answers, but a comprehensive quantitative analysis can provide insights that will allow a buyer to make a clear-eyed selection. Some of the most common approaches to the quantitative analysis include:

  • Using multiple forecasts of the floating wholesale power price and comparing these to the fixed contract price, resulting in a range of expected implied REC values
  • Stress-testing wholesale power price forecasts to understand potential value under a range of market conditions
  • Using a historical look-back to see how the contract would have performed if it had been executed three-to-five years ago

Executing a PPA is an incredibly powerful tool for meeting your corporate sustainability, renewable energy and GHG reduction goals. We encourage you to think critically about the early steps you can take to set yourself up for the successful execution of a well-understood and risk-mitigated contract.

If you are looking for help with an upcoming PPA or VPPA transaction, learn more about our renewable energy procurement services or contact us.

 

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

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. 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

Bearkat 1: Texas Wind Farm

Bearkat 1: Texas Wind Farm 

Just east of Midland, TX, a new wind project called Bearkat 1 has recently completed construction. The massive new wind turbines provide a stark contrast to the oil wells that make up much of the West Texas skyline.

Bearkat is one of the first U.S. wind development projects owned by the Danish organization Copenhagen Infrastructure Partners and 3Degrees committed to a long-term REC off-take from this new project.

The full development will be comprised of 104 Vestas V126-3.45 MW wind turbines, spanning nearly 30,000 acres and will generate close to 360 MW of clean energy. The scale of this project is so large that it was developed in two separate phases.

+    Bearkat 1: 57 turbines that will generate 197.6 MW of wind energy

+    Bearkat 2: Began development immediately after the first phase was up and running and has a lifetime capacity of 162.1 MW. This project consists of 47 turbines, resulting in a total of 104 wind turbines between the two projects.

Tri Global Energy (TGE), the developer of the Bearkat project, has a unique business model that engages landowners at a very intimate level and offers them unique benefits.  Instead of paying upfront costs for developing a new wind project on landowners’ property, TGE provides a guarantee for electricity royalties for the next 50 years, providing the landowners with equity in the wind farm developed on their property. Because of the sheer size of Bearkat, 55 different landowners will be able to take advantage of this incentive for decades to come.

3Degrees + RECS

 

www.green-e.org

3Degrees’ Multiple Mix Product is Green-e Energy certified and meets the environmental and consumer protection standards set forth by the nonprofit Center for Resource Solutions. Learn more at: www.green-e.org.

 

 

 

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.

 

Renewable energy power purchase agreements

Wind Turbine

This article was updated in February 2018.

Viable procurement options for corporate and industrial buyers

As we discussed in the first article of this series, today’s renewable energy landscape has dramatically changed in recent years in large part because of the increasing pool of potential buyers –commercial and industrial (C&I) organizations. This new buyer pool has wider, easier access to a broad array of large-scale direct renewable energy procurement options and is implementing on-site solar and off-site PPAs at a record-breaking pace. But deciding which option is right for your organization can be complex.  This series helps lay the foundation to answer that conundrum. In the first article, we covered the benefits and challenges to C&I customers looking to use on-site renewable generation. This article will explore the potential of procuring renewable energy through power purchase agreements (PPAs), both physical and financial (defined below). Both types of PPAs can be powerful tools to help C&I customers develop robust clean energy portfolios and achieve sustainability goals. However, they do differ in a number of significant ways, and this article identifies these differences and other factors to consider when evaluating PPA opportunities.  

What is a PPA?

A power purchase agreement, at its core, is a contract between two parties where one party sells both electricity and renewable energy certificates (RECs) to another party. In corporate renewable energy PPAs, the “seller” is often the developer or project owner, the “buyer” (often called the “offtaker”) is the C&I entity. C&I renewable energy PPAs can take two primary forms – physical or financial (the latter often referred to as “virtual”). The best structure depends on the markets where the offtaker and projects are located, as well as the goals, priorities, and risk tolerance of the offtaker. Too often, these deals are framed as money-makers, but the real story is much more complicated. This related article dives deeper into the risks embedded in renewable energy PPAs and how to mitigate them.

Physical PPA

Physical PPAs are most commonly used by organizations that have heavy, concentrated load (e.g. data centers). This is because under a physical PPA, the seller delivers renewable electricity to the offtaker, who actually receives and takes legal title to the energy. Physical PPAs are best suited for competitive retail or direct access energy markets, such as Texas, Illinois, and California. They are possible – but significantly more difficult – in a regulated market. A physical PPA is structured as follows:

  • The offtaker buys renewable energy directly from a seller. In a typical renewable energy PPA, the developer builds, owns, and operates the renewable energy project, and sells the output to the buyer at a specified delivery point.
  • The offtaker takes title to the energy at the delivery point, as well as associated RECs.
  • The offtaker is responsible for moving the energy away from the delivery point to its load, typically done through 3rd-party service providers.

Virtual (or Financial) PPA

Unlike a physical PPA, a virtual PPA (VPPA) is a financial contract rather than a contract for power. The offtaker does not receive, or take legal title to, the electricity and in this way, it is a “virtual” power purchase agreement.

In a VPPA, an offtaker agrees to purchase a project’s output and associated RECs at a set fixed price. The developer then liquidates the energy at market pricing and passes the revenue through to the offtaker.  More specifically:

  • Similar to a physical PPA, the seller in a VPPA is oftentimes a developer who builds, owns, and operates a project and delivers the energy output to the specified point.
  • The offtaker agrees to pay the seller a fixed price for renewable energy delivered to a specific point, typically a market hub or project busbar. This fixed price set by the VPPA is the guaranteed price the developer will receive – no less and no more – irrespective of the floating market price.
  • The seller generates and liquidates a project’s energy at market pricing. When the floating market price exceeds the fixed VPPA price, the developer passes the positive difference to the offtaker. When the converse is true, the market price is below the VPPA fixed price, the offtaker must pay the developer the difference.
  • The offtaker retains all of the RECs associated with the delivered energy, as long as that is specified in the contract.

This type of structure is called a contract for difference (CFD). See the graphic below for an illustration.

VPPA - how it works

In this way, the seller is guaranteed a fixed price for the output it sells – which is critical for developers that are looking to finance new projects. These projects can be particularly attractive for buyers that want to contribute to the development of new renewable energy resources and that have electricity load that is widely dispersed.

VPPAs are typically only available in organized markets such as a regional transmission organization (RTO) or independent system operator (ISO), which serve as third-party independent operators of the transmission system, ultimately responsible for the flow of electricity within its domain. This is for two important reasons. First, VPPAs require market liquidity – where the developer, an independent power producer (IPP), is permitted to sell its power directly into the grid. This is the case in RTO/ISO regions, but not necessarily so in a vertically integrated market where a single entity is responsible for the generation, transmission, and distribution of electricity. Second, the economics of a VPPA hinge on the difference between the floating market price and the VPPA price. RTO/ISO regions pay a uniform, transparent price (varying based on time and location). The floating market price, therefore, cannot be manipulated by the developer, creating a reliable dynamic for the VPPA financial settlement.

Importantly, because no energy actually changes hands, the VPPA offtaker does not need to make any changes to how it purchases the electricity required for its operations.

Why enter a PPA?

There are four primary benefits to a PPA, regardless of whether it is physical or financial:

  1. Financial: PPAs provide a hedge against future energy fluctuations. In a physical PPA, the hedge value is realized because the buyer’s energy costs are kept flat. In a VPPA, the value is realized when revenues from the VPPA increase because market pricing has risen above the PPA price – offsetting similarly rising retail electric rates. It’s important to remember though, a hedge instrument is not intended to create upside but rather to manage downside exposure. Be wary of VPPAs with hockey stick forward energy price curves promising high net present values (NPVs)!
  2. Environmental: Both physical and virtual PPAs put clean energy into the electric grid, and the offtaker owns all the environmental benefits (RECs or carbon offsets) associated with its portion of the project. Both types of PPA RECs from wind or solar will have zero emissions and apply to WRI’s GHG Protocol Scope 2 market-based reporting methodology. And, if the PPA is with a new project, offtakers can easily and credibly claim “additionality” which, in its mostly widely-accepted definition, means directly causing a new renewable project to be built.
  3. Ability to Transact: Although PPAs are complex, they are well-understood structures. Some form of physical PPAs may even be part of an offtaker’s existing procurement practices. In addition, awareness of renewable energy PPAs has become more common through high-profile press releases by well-known companies (e.g., Google, Walmart, Amazon, etc.). All of this should facilitate internal stakeholder conversations and ultimately leadership buy-in. While VPPAs may face more scrutiny than their physical brethren – due to unfamiliarity as well as their potential accounting impacts (see below) – these barriers are surmountable.
  4. Marketing: PPAs are a well-understood renewable energy story to share with internal and external stakeholders. They also move the needle on a double bottom line – helping to achieve important corporate environmental goals while also (potentially) saving money, which makes for powerful brand and marketing narratives. And because the offtaker owns the RECs, it can make marketing claims and report on greenhouse gas reductions.

PPAs have financial, environmental, transaction, and marketing benefits.

Physical vs. Virtual

Despite these shared benefits, physical and virtual PPAs do differ in some material ways:

  • Regulatory: Physical PPAs require that the offtaker obtain power marketing authority from the Federal Energy Regulatory Commission (FERC) to purchase wholesale power from the power producer. While not insurmountable, doing so may be outside of the offtaker’s core business or simply be too time-consuming. An offtaker can engage a third party already authorized to buy power at wholesale, serving as the market participant. This, of course, has its own risks (see below). Because no power is changing hands in a VPPA, the offtaker does not require FERC authority.
  • Regulatory (again): Although the regulatory requirements for VPPAs are still being formed, the prevailing view is that these contracts are “swap” agreements and therefore bound by Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which includes reporting, recordkeeping and registration requirements for swap transactions. Physical PPAs are not typically considered swaps subject to Dodd-Frank. However, if a physical PPA contains specific terms (e.g., price optionality, buyer curtailment rights, option for financial settlement), it may in fact be deemed a swap and subject to ongoing reporting obligations. See this article for more.
  • Transmission/Delivery: Physical PPA offtakers need to consider what happens with the energy once they receive and take title to it and find a solution to move the purchased energy to its locations, requiring transmission, distribution, and delivery. C&I offtakers would typically contract with third party providers for these services, and perfectly syncing the deal terms of these services (typically limited to a couple to several years) with those of longer-term PPAs is unlikely and can add a compounding layer of risk and complexity to the overall transaction.
  • Location: As mentioned above, physical deal structures where the energy is delivered to an offtaker’s facility are limited to competitive retail markets (i.e., PJM, Northeast, ERCOT and other isolated states in MISO and WECC). Virtual PPAs have broader potential, possible in any RTO or ISO. Further, because VPPAs are financial in nature and don’t involve moving electricity, they are not inherently location-dependent. This means offtakers can find the most attractive project, no longer limited to projects located within its immediate region. It also allows offtakers to consolidate its demand across the country to capture economies of scale.
  • Internal Approvals: PPAs will require learning on multiple levels for an organization, but VPPAs tend to be a new procurement mechanism for most offtakers, requiring education on technical and non-technical topics alike. Not to be under-estimated, VPPAs require new departmental interdependencies within organizations, which can have cascading affects across the company. Processes will need to be developed, building a new ecosystem of collaboration among otherwise distant and unfamiliar stakeholders. All this takes time, effort, and persistence.

Each of these factors should be considered when evaluating PPA opportunities.

 PPAs and VPPAs have important regulatory differences. 

Risky business?

Although PPAs are increasingly common among the C&I segment, they are not risk-free. There will be tradeoffs in every deal structure, and special attention should be paid to the following risks and potential mitigation measures.

  • Market risk:  Although offtakers have market exposure without a PPA, there is market risk within these transactions, especially VPPAs. Because a VPPA relies on a floating market price, the importance of understanding the forces which can affect that floating price – and drive it up or down – can’t be overstated. Factors that can impact future electricity pricing include renewable energy penetration, natural gas pricing, transmission and distribution upgrades, energy capacity additions and retirements (renewable and conventional), the regulatory environment, carbon pricing, severe weather occurrences, etc. Offtakers should have clear visibility into the market risks embedded in the transaction so they can make informed decisions about what risks they are, and are not, willing to take, ultimately structuring a transaction in line with their specific risk tolerance.
  • Accounting treatment: For many C&I offtakers, the accounting treatment of a VPPA is the first make-or-break decision regarding a potential transaction. In many cases, the offtaker will obtain initial approval to explore offsite renewables only if they can keep the PPA off of the balance sheet. They ask, will the deal trigger mark-to-market accounting? Fortunately, there are well understood ways to manage this risk through careful deal structuring and specific PPA language. For example, one way for an offtaker to manage a developer’s performance is to include an output guarantee – a minimum amount of generation the developer will deliver. However, an output guarantee is considered a notional value to the contract, thus triggering derivative accounting. As a result, contracts are often structured with an availability guarantee which accomplishes similar assurances of developer performance but avoids the risk related to accounting treatment of the VPPA. The bottom line here is that VPPAs will require the deal champion – and an advisor – to work extensively with your organization’s various accounting stakeholders and an experienced energy accountant.

The importance of a trusted advisor

Both physical and virtual PPAs offer strong financial and environmental opportunities to C&I organizations, but they can come with material complexity and risk. VPPAs are most common in today’s market but they are not right for every organization. We recommend working closely with a trusted advisor to determine which option is best for your organization.

Interested in learning more about PPAs and VPPAs? Check out our consulting services or contact us.