Clean Energy Future by Arno Harris

Solar PPA: Role in Carbon Footprint Reduction

I hear constantly from well-meaning but frustrated companies struggling to prioritize the various carbon reduction opportunities in front of them. At its simplest level, the problem is best broken down into three steps:

1. Quantifying and categorizing a company's carbon footprint or GHG inventory;
2. Determining what mitigation strategies are most credible and relevant; and,
3. Prioritizing the most cost-effective of those strategies to deploy.

The GHG community has largely settled on the WRI/WBCSD GHG Protocol as a means of achieving the first step. In short, it identifies three "scopes" or emissions categories that define a corporate GHG inventory:

• Scope 1: Direct Emissions - a company's direct GHG emissions from equipment and processes owned or directly controlled by the company.
• Scope 2: Indirect / Energy-Related Emissions - GHG emissions related to electricity or steam purchased from third parties.
• Scope 3: Indirect / Other Emissions - GHG emissions related to a company’s activities, but from sources not owned or controlled by the company. Scope 3 emissions can include upstream emissions from suppliers and raw materials industries, downstream emissions from customers that result from the use of a company product, or even employee travel.

(Mark Trexler has an interesting post on this that is well worth reading, particularly as he addresses some of the thornier issues associated with Scope 3 emissions definition and potential for double-counting between Scopes.)

For this discussion, the important point is that most companies will focus their efforts on Scope 1 and Scope 2 emissions--because those are the emissions most directly connected to a company's controllable operating activities and those that are most likely to be subject to future regulation.

Furthermore, according to the EPA, "generating electricity is the single largest source of CO2 emissions in the United States, representing 38 percent of all CO2 emissions." And, for the majority of non-industrial businesses in the US, electricity usage is the largest driver of their GHG inventories. This leads to an interesting insight, which is that most US companies will find the biggest opportunity for GHG mitigation focused on reducing and/or greening their electricity consumption.

This is in part why there has been so much attention and skepticism around the use of RECs. As companies have sought to quickly and easily green their energy consumption, some have ended up calculating their Scope 2 emissions and then addressing them by just offsetting their inventory with a bulk REC purchase. While this has the allure of being easy, it raises a number of questions about the quality of GHG inventory reduction achieved. The ironic result is that companies that are trying to do something good end up running the risk of damaging their credibility.

A more robust Scope 2 mitigation strategy should focus on (1) reducing energy consumption through elimination of waste and inefficiency and (2) displacing third-party energy sources with clean on-site energy (usually solar power). Offsetting with RECs should be applied only to the remaining energy balance after all efficiency and on site energy opportunities have been exhausted.

Historically, the main challenge for companies engaging in efficiency and energy projects has been challenge of allocating capital to various projects because of the complexities of calculating project returns that incorporate tax benefits, utility incentives, and performance risk. The development of energy service performance contracts and solar PPA's removes this hurdle, enabling companies to make efficiency and solar power commitments on a pay-as-you-go basis with predictable pricing and no capital investment. From my perspective, these innovations play a key role in enabling companies to achieve robust Scope 2 mitigation with a lot more certainty that they are taking the right steps in the right order.

In closing, here's a link to a slide from one of our presentations on how we see Solar as a Service (Recurrent Energy's solar PPA offering) fitting into the overall GHG protocol,

The Rise of the PPA

ThinkEquity's latest GreenTech Newsletter confirmed what all of us in the California solar industry are witnessing firsthand: (1) the California Solar Incentive is "the locomotive hauling the nation into the global PV market" and (2) the beginning of  true mainstream adoption of onsite solar power facilitated by the rise of the Power Purchase Agreement (PPA).

In the last few weeks, we've seen large solar commitments by two signficant retailers. Kohl's Department Stores announced it would cover 75% of its California stores in the coming years--at an average store size of 88,000 sf that pencils out to somewhere between 20 and 30 MW of solar installations for one customer alone. That announcement was followed by one from Walmart providing notice of a 22-store solar pilot project in California and Hawaii estimated at 11MW. Target also announced a smaller scale pilot  in the same time frame for several of its California stores.

These deals are remarkable for their size, who's buying, and why--and it's these aspects that demonstrate why I consider this a sign of a mainstream market adoption trend. In an earlier post, I explored the idea of mapping technology market adoption models to greentech markets. One of the key purchase behaviors that distinguishes early adoption from mainstream adoption is buyer motivation. Mainstream customers are pragmatic buyers who's purchase rationale is to secure an important business advantage. Kohls, Walmart, and Target are buying solar power for two principal reasons: (a) energy is one of a retailer's biggest controllable operating expenses, and (b) as consumer-facing brands they benefit from associating green values closely (and credibly) with the customer experience. That combined with the scale of the commitments is enough to convince me that these qualify as mainstream behavior markers.

I remember once talking with an operating executive at a large grocery chain several years ago who told me that his company "made money by saving money." In thin-margin, competitive industries, understanding and capitalizing quickly on opportunties for saving is a key part of maintaining a competitive edge. That's why the PPA is such an important part of this market picture. Mainstream buyers seeking competitive advantage typically do not want to invest capital directly in a solar power system because they can't control enough of the operating risks to guarantee a sufficient economic return. It makes much more sense to hire an expert vendor to own and operate the system -- and then buy the energy at a competitive rate as it is needed (locking in predictable energy prices).

Based on what my company, Recurrent Energy, is seeing out there in terms of interested buyers and deal opportunities, I think we're going to see more announcements soon that will continue the mainstream trend. For those of us who've dreamed about this since 2001 when California's first solar incentives launched, it's a welcome development indeed!

Skepticism and Carbon Neutrality

It was just months ago that Webster's named "carbon neutral" the word of the year. But in the last month or two, we've seen the first wave of "neutrality skepticism" expressed in articles from publications like NYTimes, FT, and Newsweek.

We can argue about whether these article got the details right, but I think that misses the point. The reality is that the media and the general public have a justifiable right to be skeptical about the neutrality claims and the related use of credits and offsets. In voluntary markets, this has been the focus of a heated industry debate for some time now. However, even in the EU ETS, it's apparent that there is a wide range of quality issues and accounting problems with CDM-originated offsets and gaming of credit allocations.

Rather than denying there's an issue, the neutrality and renewables industries need to take the issue head on. This is a credibility issue that threatens to undermine the public's trust in the very notion of trading emissions, a principle that is critical to ensuring the marginal cost of reversing our emissions trends is shared fairly and equally among market participants. If the public's skepticism attaches to the notion of trading emissions--rather than to the underlying issues of credit quality, standards, accounting methods, and neutrality practices--we will have lost a valuable economic tool in the fight to capture externalities and reverse climate change.

I'm a huge believer in credit/offset trading for both carbon and renewable energy--so I see this issue framed from the perspective of an enthusiastic advocate. In my opinion, the industry needs to do two things quickly:

• Adopt standardized methods and practices for achieving carbon neutrality. Some very well-meaning companies have received poor advice and have chosen as a result to simply "offset" their carbon footprint with bulk REC and/or carbon credit purchases. We need to encourage more rigorous practices that emphasize process change, energy efficiency, and onsite renewables--with offsetting as a final method for addressing emissions that cannot be reduced otherwise.
• Address the quality problem by establishing rigorous standards for the origination and accounting of credits/offsets. There are industry groups working to do this now, and it's my hope that what results are credible and rigorous, rather than self-serving, standards.

Certainly we should not let "perfection be the enemy of the good"--yet conversely we cannot let market expedience be the argument for practices that hurt the public perception of the neutrality industry in the long term.