WRI Publications Feed: WRI Corporate Consultative Group

The Corporate Ecosystem Services Review: Guidelines for Identifying Business Risks & Opportunities Arising from Ecosystem Change

Suzanne Ozment — Tue, 07 Feb 2012 16:32:54 -0500

Summary

Ecosystems provide businesses with numerous benefits or “ecosystem services.” Forests supply timber and wood fiber, purify water, regulate climate, and yield genetic resources. River systems provide freshwater, power, and recreation. Coastal wetlands filter waste, mitigate floods, and serve as nurseries for commercial fisheries.

However, human activities are rapidly degrading these and other ecosystems. The Millennium Ecosystem Assessment— the largest audit ever conducted of the condition and trends in the world’s ecosystems—found that ecosystems have declined more rapidly and extensively over the past 50 years than at any other comparable time in human history. In fact, 15 of the 24 ecosystem services evaluated have degraded over the past half century. The Assessment projected further declines over coming decades, particularly in light of population growth, economic expansion, and global climate change. Left unchecked, this degradation could jeopardize future economic well-being, creating new winners and losers within the business community.

Ecosystem degradation is highly relevant to business because companies not only impact ecosystems and the services they provide but also depend on them. Ecosystem degradation, therefore, can pose a number of risks to corporate performance as well as create new business opportunities. Types of risks and opportunities include:

Operational

Risks such as higher costs for freshwater due to scarcity, lower output for hydroelectric facilities due to siltation, or disruptions to coastal businesses due to flooding
Opportunities such as increasing water-use efficiency or building an on-site wetland to circumvent the need for new water treatment infrastructure

Regulatory and legal

Risks such as new fines, new user fees, government regulations, or lawsuits by local communities that lose ecosystem services due to corporate activities
Opportunities such as engaging governments to develop policies and incentives to protect or restore ecosystems that provide services a company needs

Reputational

Risks such as retail companies being targeted by nongovernmental organization campaigns for purchasing wood or paper from sensitive forests or banks facing similar protests due to investments that degrade pristine ecosystems
Opportunities such as implementing and communicating sustainable purchasing, operational, or investment practices in order to differentiate corporate brands

Market and product

Risks such as customers switching to suppliers that offer eco-certified products or governments implementing new sustainable procurement policies
Opportunities such as launching new products and services that reduce customer impacts on ecosystems, participating in emerging markets for carbon sequestration and watershed protection, capturing new revenue streams from company-owned natural assets, and offering eco-labeled wood, seafood, produce, and other products

Financing

Risks such as banks implementing more rigorous lending requirements for corporate loans
Opportunities such as banks offering more favorable loan terms or investors taking positions in companies supplying products and services that improve resourceuse efficiency or restore degraded ecosystems.

Unfortunately, companies often fail to make the connection between the health of ecosystems and the business bottom line. Many companies are not fully aware of the extent of their dependence and impact on ecosystems and the possible ramifications. Likewise, environmental management systems and environmental due diligence tools are often not fully attuned to the risks and opportunities arising from the degradation and use of ecosystem services. For instance, many tools are more suited to handle “traditional” issues of pollution and natural resource consumption. Most focus on environmental impacts, not dependence. Furthermore, they typically focus on risks, not business opportunities. As a result, companies may be caught unprepared or miss new sources of revenue associated with ecosystem change.

The Corporate Ecosystem Services Review (ESR) is designed to address these gaps. It consists of a structured methodology that helps managers proactively develop strategies to manage business risks and opportunities arising from their company’s dependence and impact on ecosystems. It is a tool for strategy development, not just for environmental assessment. Businesses can either conduct an Ecosystem Services Review as a stand-alone process or integrate it into their existing environmental management systems. In both cases, the methodology can complement and augment the environmental due diligence tools companies already use.

The Ecosystem Services Review can provide value to businesses in industries that directly interact with ecosystems such as agriculture, beverages, water services, forestry, electricity, oil, gas, mining, and tourism. It is also relevant to sectors such as general retail, healthcare, consulting, financial services, and others to the degree that their suppliers or customers interact directly with ecosystems. General retailers, for example, may face reputational or market risks if some of their suppliers are responsible for degrading ecosystems and the services they provide.

This publication describes the five steps for performing an Ecosystem Services Review. It provides an analytical framework, case examples, and helpful suggestions for each step. It concludes by highlighting a number of resources managers can use when conducting an ESR, including a “dependence and impact assessment” spreadsheet, scientific reports, economic valuation approaches, and other issue-specific tools.

As of 2012, an estimated 300 companies have used the Ecosystem Services Review. In addition, complementary tools and guidance now exist to help companies more fully assess business risks and opportunities emerging from ecosystem change. For example, in 2011 the World Business Council for Sustainable Development released the Guide to Corporate Ecosystem Valuation (CEV), which provides information on how to quantitatively, or in some cases monetarily, assess risks and opportunities related to ecosystem services. CEV can therefore be a logical next step after undertaking an ESR. The Economics of Ecosystems and Biodiversity (2010) highlighted new examples of the linkages between business and ecosystem services. The ESR remains a fundamental starting point for companies to assess business risks and opportunities related to ecosystem change.

Global degradation of ecosystems and the services they provide threatens to alter the landscape in which business operates. The Ecosystem Services Review is a proactive approach for companies to manage the risks and opportunities that are emerging. Furthermore, by helping companies make the connection between healthy ecosystems and the bottom line, it will encourage not only more sustainable business practices, but also business support for policies to protect and restore ecosystems.

WRI developed the ESR in collaboration with the Meridian Institute and the World Business Council for Sustainable Development (WBCSD). Five WBCSD member companies—Akzo Nobel, BC Hydro, Mondi, Rio Tinto, and Syngenta—road-tested the methodology, providing feedback and case examples. Since 2008, an estimated 300 companies have used the Ecosystem Services Review. Yves Rocher, Lafarge, and CEMEX have also contributed ESR case studies to demonstrate the experience and results of the method.

Greenhouse Gas Protocol Product Life Cycle Accounting and Reporting Standard

Maggie Barron — Mon, 03 Oct 2011 22:58:31 -0400

The GHG Protocol Product Life Cycle Accounting and Reporting Standard (referred to as the Product Standard) provides requirements and guidance for companies and other organizations to quantify and publicly report an inventory of GHG emissions and removals associated with a specific product. The primary goal of this standard is to provide a general framework for companies to make informed choices to reduce greenhouse gas emissions from the products (goods or services) they design, manufacture, sell, purchase, or use. In the context of this standard, public reporting refers to product GHG-related information reported publicly in accordance with the requirements specified in the standard.

Related Standards

New! Corporate Value Chain (Scope 3) Accounting and Reporting Standard

Corporate Accounting and Reporting Standard

As awareness about climate change increases and concerns grow, investors are demanding more transparency, and consumers are seeking greater clarity and environmental accountability. Companies are increasingly receiving requests from stakeholders to measure and disclose their corporate GHG inventories, and these requests often include a company’s products and supply chain emissions. Companies must be able to understand and manage their product-related GHG risks if they are to ensure long-term success in a competitive business environment and be prepared for any future product-related programs and policies.

This standard focuses on emissions and removals generated during a product’s life cycle and does not address avoided emissions or actions taken to mitigate released emissions. This standard is also not designed to be used for quantifying GHG reductions from offsets or claims of carbon neutrality.

Ultimately, this is more than a technical accounting standard. It is intended to be tailored to business realities and to serve multiple business objectives. Companies may find most value in implementing the standard using a phased approach, with a focus on improving the quality of the GHG inventory over time.

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Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard

Maggie Barron — Mon, 03 Oct 2011 22:57:38 -0400

The primary goal of this standard is to provide a standardized step-by-step approach to help companies understand their full value chain emissions impact in order to focus company efforts on the greatest GHG reduction opportunities, leading to more sustainable decisions about companies’ activities and the products they buy, sell, and produce. The standard was developed with the following objectives in mind:

Related Standards

New! Product Life Cycle Accounting and Reporting Standard

Corporate Accounting and Reporting Standard

To help companies prepare a true and fair scope 3 GHG inventory in a cost-effective manner, through the use of standardized approaches and principles
To help companies develop effective strategies for managing and reducing their scope 3 emissions through an understanding of value chain emissions and associated risks and opportunities
To support consistent and transparent public reporting of corporate value chain emissions according to a standardized set of reporting requirements Ultimately, this is more than a technical accounting standard. It is intended to be tailored to business realities and to serve multiple business objectives. Companies may find most value in implementing the standard using a phased approach, with a focus on improving the quality of the GHG inventory over time.

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Is the Fit Right? Considering Technological Maturity in Designing Renewable Energy Policy

Kevin Lustig — Thu, 11 Aug 2011 14:20:52 -0400

Recent studies suggest that the United States can greatly expand its deployment of renewable energy resources beyond current levels. This would reduce emissions of harmful pollutants and enhance energy security by diversifying the nation’s domestic energy supply. This brief describes a number of policy tools that can be employed to drive investment in renewable energy technologies and discusses which policy options may be the best fit based on the commercial maturity of a targeted technology. We examine several policy tools to describe where they have been most effective to advance technology progress along the innovation chain. The findings and recommendations presented are based on a study of the literature on technology innovation and policy best practices, as well as on discussions with experts in the field, policymakers, and private sector companies involved in renewable energy projects.

Key findings:

Grants can be used to fund technologies in their earliest stages—research and development (R&D) and early-stage demonstration. The R&D stage involves significant uncertainty as to whether the concept will ever lead to a viable technology application. Grants help overcome this risk because they provide an important cost share for investment to research and develop the technology further. Technologies in the demonstration stage typically have difficulty accessing commercial investment due to uncertainty on technical performance and the inability to provide performance warranties. It is unclear whether they will eventually be financially profitable, particularly in the near-term. Demonstration grants allow commercial investors time to pilot and evaluate a new technology with appropriate due diligence. This can reduce risk perception and facilitate further investment.
Loan guarantee programs are well suited for technologies in the commercialization and early deployment stages. In these stages, project performance remains uncertain, making it difficult to attract investors. Loan guarantees help attract private investors by sharing the risk of technical failure with a financially secure and credible entity (namely, a government agency).
Tax credits and feed-in tariffs (FITs) can help advance technologies in the later stages of innovation, namely commercialization and early deployment. These policies allow projects to earn more profit for electricity produced so that they earn the revenues needed to offset higher upfront investment costs.
Renewable electricity standards (RES) are most effective for more mature technologies that are in early deployment. An RES creates demand for renewable electricity and allows the market to determine how to most efficiently supply it; thus the market sets the premium paid to renewable resources. RES mandates can allow for open competition among a range of different technologies, or can be tailored with a carve-out to promote specific technologies that are not yet cost competitive with other renewables. The carve-out option can be a good fit for technologies that are still in the commercialization phase.
A favorable regulatory environment is important to ensure that renewable energy technologies do not face inherent disadvantages due to interconnection standards, utility pricing structures, and other legal hurdles. Failing to address regulatory barriers to renewables can increase their cost of deployment and reduce the effectiveness of incentive programs.

Sustainable Procurement of Wood and Paper-Based Products: Version 2

Ruth Nogueron — Fri, 22 Jul 2011 08:52:22 -0400

Find out more at http://www.sustainableforestprods.org

Version 2 contains updates to the sections on legality and useful resources, known as the "guide to the guides." The guide now describes 47 tools and resources (13 more than in the previous version) that aid sustainable procurement of forest products.

Decisions regarding the purchase and use of wood and paper-based products can have far-reaching, long-term impacts for the forests where they are harvested, the communities supported by wood-using industries, and the places where those products are purchased and used.

The information in this joint WRI/WBCSD publication is organized around ten key issues, posed as "essential questions" that procurement managers might address related to the sustainable procurement of wood and paper-based products:

Origin: Where do the products come from?
Information accuracy: Is information about the products credible?
Legality: Have the products been legally produced?
Sustainability: Have forests been sustainably managed?
Special places: Have special places, including sensitive ecosystems, been protected?
Climate change: Have climate issues been addressed?
Environmental protection: Have appropriate environmental controls been applied?
Recycled fiber: Has recycled fiber been used appropriately?
Other resources: Have other resources been used appropriately?
Local communities and indigenous peoples: Have the needs of local communities or indigenous peoples been addressed?

The publication is designed as an information tool to help customers develop their own sustainable procurement policies for wood and paper-based products. It is also a decision support tool providing simple and clear information on twenty-two existing approaches to the procurement of wood and paper-based products from legal and sustainable sources, as well as providing additional references and resource materials.

Bottom Line on Public-Private Finance Tools for Energy Efficiency

Maggie Barron — Thu, 30 Jun 2011 08:33:11 -0400

On-bill financing

How does on-bill financing provide capital for energy efficiency?

On-bill financing allows a loan for energy efficiency measures to be repaid over time via an additional line item on the recipient’s utility bill, which decreases repayment risk for the lender. The lender in “classic” utility on-bill financing has traditionally been the utility itself. Hybrid models have also emerged in which public and private funds are pooled to offer low-interest loans, with repayment similarly attached to the utility bill. The utility then collects the payment and returns it to the lender, which lowers the lender’s administrative costs. The utility customer benefits from lower energy costs after retrofits, and typically pays loans back over a period of about 2–5 years.

Where has this model been implemented?

One example of a successful on-bill financing program is the Connecticut Energy Efficiency Fund’s Small Business Energy Advantage Program, which is administered by two electric utilities in the state. The fund finances low-interest loans for projects using pre-approved contractors, and eligibility is determined by the customer’s payment history rather than by credit check. In the case of one utility, United Illuminating, over 25% of the small business customer base has participated in the program.

Commercial Property Assessed Clean Energy (PACE) Financing

How does Property Assessed financing work?

Property assessed financing1 reduces repayment risk and lowers interest rates by securing loans with a tax lien on the property. The key attributes of property assessed financing are that programs offer upfront loans for voluntary energy efficiency upgrades, which are paid back through an extra line item on the property tax bill. Payments should be less than the energy savings to yield a net gain for the consumer.

How are property assessed (PACE) loans channeled to projects?

Some cities issue bonds to raise money that they lend directly to borrowers for upgrades. Another option leverages commercial banks to provide loans, either to property owners directly or to Energy Service Companies (ESCOs). Such programs rely on commercial banks to make loans to companies for retrofits; the city simply assigns the liens on the properties to the bank as security. Loan terms typically vary from 5–20 years and interest rates are low, reflecting reduced risk because the loan is senior to all other obligations.

Was PACE financing deemed a violation of mortgage agreements in the U.S.?

Tax liens are commonly used by cities to fund public services, and the mortgage industry in the U.S. has accepted this as standard practice. However, commercial PACE programs require that property owners obtain consent from their mortgage holders before participating if the PACE loan has priority repayment ahead of the mortgage. This is in part to avoid the resistance that residential PACE programs encountered from major mortgage underwriters, which has largely stopped residential PACE programs in the United States. Commercial PACE programs have thus far been allowed to continue without being deemed a violation of mortgage lending rules.

Where has this model been implemented?

Seventeen U.S. commercial PACE programs are either in operation or planning, and several Canadian cities are considering programs. Proven successes include the Sonoma County Energy Independence Program and Boulder, Colorado’s Climate Smart Program.

Sustainable Energy Utility Model

What is a Sustainable Energy Utility?

A Sustainable Energy Utility (SEU) is an institution whose core service is to facilitate access to energy efficiency. It is typically created through legislation to administer financing programs, offer technical services, and coordinate the services of private ESCO’s and banks. An SEU is not a financing mechanism in and of itself – rather, it is a “one stop shop” that leverages financing tools, reduces transaction costs for lenders, and organizes actors to make energy efficiency significantly easier.

Where are SEU’s already at work?

Vermont, Wisconsin, Oregon, New York, Delaware, and the District of Columbia all have independent not-for-profit providers of energy efficiency services that perform the functions of an SEU. Efficiency Vermont is one of the oldest: founded in 2000, it has significantly reduced the upfront cost to deliver energy savings. It is funded by a “wires charge” on each kWh sold in Vermont, which had previously been given to the utilities to perform demand side management. Delaware’s SEU was authorized to issue tax-exempt bonds and collect funds from other sources. It will create a Sustainable Energy Revolving Fund making loans at 3.5–5% interest rates, and can also award rebates.

Loan Guarantees

How do loan guarantees improve financing?

Energy efficiency investments are often perceived as risky by banks because of their unfamiliarity with the technologies and investment structures used, as well as the monitoring needed. Companies can typically only borrow money to finance these measures if they have good credit and give the lender recourse to their assets as a guarantee. However, when a public agency with good credit offers a loan guarantee, banks can lend at lower interest rates and/or extend the term of the loan because the guarantor has promised to ensure timely repayment. Individual loans or a portfolio of loans can be covered by either partial or full risk guarantees.

Loan Loss Reserve Funds

What is a Loan Loss Reserve Fund?

A loan loss reserve fund (LLRF) is another way of backing energy efficiency borrowers. If the borrower defaults, then the lender is paid back out of the reserve fund, reducing or eliminating repayment risk. A LLRF can secure a single loan or a portfolio of loans, and is often used for the latter. One example is the loss sharing facility implemented by the Global Environment Facility (GEF) and the International Finance Corporation (IFC) as part of the China Utility-Based Energy Efficiency (CHUEE) program. The IFC and the GEF set up a LLRF that guarantees loans made by local commercial banks to energy management companies who finance upgrades for their customers. This “Loss Sharing Facility” will refund 75% of the first 10% of the loan amount in case of default, and 40% of any losses on the remaining 90% of the loan amount. With $USD 50 million in loss reserve funds contributed by the GEF and IFC, the program seeks to mobilize $USD 0.7-1.45 billion for energy efficiency project financing from the private sector.

What is the difference between a LLRF and a loan guarantee?

A LLRF is another way to guarantee a loan without relying on the credit of an institution as Guarantor. An actual sum of money must be set aside in an escrow account, rather than an organization pledging its credit. Either one can be structured to repay full or partial losses in case of default.

Loan guarantees and reserve funds can work in conjunction with other types of loans. They can also be coupled with PACE programs to make mortgage lenders more comfortable that PACE loans will not increase mortgage defaults. For example, California passed a law in 2010 establishing the PACE Reserve Program to help local jurisdictions raise bond revenues at lower cost to fund their PACE programs, and thereby offer lower interest rates to consumers. A LLRF could be seeded by public funds but become self-sustaining if funded by a fee on each loan.

How can governments raise funds to leverage additional private-sector lending?

The five financing programs described above can be implemented by local, state, and federal governments in cooperation with the private sector. Such programs have leveraged significantly more private investment than their cost to administer, but do still require some upfront public investment. Governments can raise funds by establishing a small utility fee on electricity sold, requiring utilities to re-invest some revenues in energy efficiency, and/or issuing bonds.

In summary, barriers to financing energy efficiency can be overcome through public-private financing tools. Small investments by government to reduce the risk of lending to energy efficiency projects can unlock major private sector investment, as well as significant environmental benefits.

Resources for Further Information

Purchasing Power: Best Practices Guide to Collaborative Solar Procurement

Maggie Barron — Mon, 25 Apr 2011 13:30:59 -0400

Executive Summary

Background

Solar photovoltaics (PV) is a commercially proven technology and, in markets with incentives, can compete with traditional fossil fuel-based power. Wider adoption and decreases in manufacturing costs are driving down the cost of solar electricity. As the industry grows and matures, it will optimize and standardize its practices to further reduce costs and make solar energy accessible to a mainstream market. The crucial role of policy in accelerating this industry growth and maturation cannot be understated. Today, however, several barriers remain to bringing solar PV to scale:

Transaction costs can be high. Because the industry is fragmented and installation processes are not standardized around the country, each developer has different procedures and negotiated contracts. Allocating internal staff resources to research solar power and to negotiate fair contracts for each potential site can be expensive.
Learning takes time and effort. Potential buyers have to learn on their own about the solar market, financing, and technology, while building internal consensus for moving forward.
Demand is fragmented with many individual sites being developed opportunistically. The current patchwork approach of designing, permitting, contracting, and installing systems for one facility at a time is inefficient.

These barriers help explain the slow pace of solar PV adoption among commercial and government consumers. However, collaborative purchasing can help overcome these barriers and scale up solar PV deployment. By organizing interested consumers (and their potential installation sites) into groups, collaborative purchasing can reduce transaction costs, educate potential buyers, and aggregate demand so that solar panels can be installed at lower-than-average costs.

Purpose

This Best Practices Guide is intended to assist commercial and government entities in the process of organizing and executing a collaborative solar purchase. A measure of success will be the number of readers who use this guide in purchasing solar power to meet their electricity needs more sustainably and at an affordable price. The guide outlines a list of best practices, which together constitute a 12-step process to capture the economic and practical benefits of a joint purchase. The starting point for participating in such an effort is simply an interest in purchasing solar electricity. The best practices are intended as a resource for project planning and decision making. They provide specific actions in chronological order, with milestones to indicate when to move from one step to the next. The end goal is that regional groups of participants will have solar PV installed on their facilities at competitive prices.

Experts in the solar energy field, including those specializing in regional collaboration, helped to develop the best practices presented here. They are based on extensive research and real-world experiences, and are supported by case studies (one a private sector collaborative and one with public-sector participants). These two cases were unique models of regional collaboration, among the first in the country at this scale. Like all new approaches to a problem, both efforts encountered challenges along the way. Throughout the guide, we illustrate the lessons learned from these challenges, point out pitfalls to avoid, and highlight ways to streamline the process. We also provide resources, such as solicitation and procurement documents, participant questionnaires, and evaluation criteria.

By promoting the use of this guide and sample documents, we hope to encourage the use of these models for regional collaborative efforts. Successful collaboration can lead to lower costs, increased competition and vendor performance, and better projects with higher visibility.

Twelve Steps for Collaborative Solar Purchasing

1 Early regional recruiting

RESULTS: Initial participants indicate interest and agree to proceed with site identification and assessment in next stage.

2 Initial participant questionnaire

RESULTS: List of potential participating organizations with site opportunities and considerations documented.

3 Solar project workshop

RESULTS: All participants share common understanding about the basics of collaborative purchasing, key metrics to evaluate, timeline, and expectations of them. Lead organization has been identified.

4 Consolidated analysis of sites

RESULTS: Compelling technical overview of total purchase size and individual bundles. This initiative overview is consolidated into packet including talking points explaining expected benefits for participants and lead organization.

5 Internal decision maker consultation

RESULTS: Buy-in to proceed in procurement process to drafting RFP is obtained from decision makers in each participant/lead organization.

6 Design of procurement process & documents

RESULTS: All participants agree to procurement process, template contracts, and standard terms with understanding of risks and opportunities.

7 Request for proposals

RESULTS: RFP issued with compelling bids received from potential vendors.

8 Proposal evaluation

RESULTS: Winning bidder is selected for each bundle through competitive process that ensures best-value vendor selection.

9 Negotiations and award

RESULTS: Negotiations are complete with successful award and signed contracts with a qualified vendor for each bundle, within agreed timeline.

10 Installation project management

RESULTS: Solar PV systems are properly built to meet or exceed specifications and safety standards.

11 Commissioning and operations

RESULTS: Successful solar installations demonstrate energy production and savings as planned for 25 years or more.

12 Celebration of success

RESULTS: Participants’ internal and external stakeholders, regional community, and government are aware of the positive impact of this effort and support future projects.

How U.S. Federal Climate Policy Could Affect Chemicals’ Credit Risk

admin — Fri, 11 Feb 2011 12:25:04 -0500

Any significant federal action to address climate change would likely be most relevant for subsectors of the U.S. chemicals industry that have significant greenhouse gas (GHG) emissions or a high dependence on natural gas- or oil-derived raw materials. Almost half of the 2007 value of shipments of the $724 billion U.S. chemicals manufacturing industry—mostly commodity chemicals—fit this description.

These include the following 13 manufacturing subsectors, which comprised more than 90% of the U.S. chemicals industry’s direct GHG emissions in 2006:

Alkalies and chlorine,
Carbon black,
Cyclic crude and intermediates,
Ethyl alcohol,
Industrial gas,
Nitrogenous fertilizer,
Noncellulosic organic fiber,
Other basic inorganic,
Other basic organic,
Petrochemical,
Phosphatic fertilizer,
Plastic material and resin, and
Synthetic rubber

In the first part of the analysis, WRI describes scenarios under two types of potential federal climate policy—an economy-wide market-based system (specifically, cap-and-trade legislation) and Environmental Protection Agency (EPA) regulation of GHGs. In the second part, WRI and, in certain discrete issues, Standard & Poor’s look at how these policy scenarios could influence credit risk factors in 13 greenhouse gas-intensive chemicals subsectors. In the final, third part, Standard & Poor’s applies these findings.

Key Findings

Credit impact under cap-and-trade scenarios

If passed, the American Power Act (APA) would require companies to hold permits to emit GHGs for all emissions from facilities emitting more than 25,000 tons of carbon dioxide (CO2) or equivalent greenhouse gas. Most large U.S. chemical facilities would meet this threshold.(iv) By limiting the supply of these permits—known as emissions allowances—in the market, the government would be able to cap economy-wide emissions. The APA also includes provisions that would rebate free emissions allowances to facilities in select subsectors. Eligibility for these free allowance rebates is at the subsector level, and depends on a subsector’s energy intensity and trade exposure.(v) WRI has calculated that the APA provides enough free allowances to energy intensive, trade exposed manufacturing industries that any eligible subsector—as a whole—will receive enough free permits to cover all emissions in that subsector for 2016 and several years beyond (see WRI’s accompanying technical document). However, the risk remains that the supply of free permits relative to demand may decline over time and at a faster rate than originally envisaged.

Predicting how the APA would affect the economy is challenging. For their analysis, Standard & Poor’s and WRI have each relied on the U.S. Government’s Energy Information Administration’s (EIA) projections of APA’s impact on GDP, energy prices, and GHG emissions permit prices.(vi) As with any forecasting, these projections indicate what could happen, rather than what would happen.

Subsector-level evaluation

Standard & Poor’s and WRI based their respective analyses on EIA projections using three GHG permit price scenarios—low, medium, and high—under the APA. Based on these projections, most of the chemicals subsectors we examined would only see modest energy and compliance effects in the first year of assumed compliance (2016).

The EIA projects only modest changes relative to no policy for most natural gas and oil-derived energy inputs in 2016 under the APA. Only well-head natural gas prices increase significantly—from 4% to 25% higher relative to no policy in the three scenarios Standard & Poor’s and WRI considered— while petroleum and coal prices decrease modestly—from 1% to 9% lower relative to no policy.

These projections are premised on the assumption that users across the economy will likely switch away from emissions-intensive fuel/feedstock sources (i.e., petroleum and coal) and demand lower emissions fuel/feedstock sources (including natural gas) because of the price signal cap-and-trade policy creates. APA provisions require utilities to pass any free allowances they receive to industrial consumers, including chemicals manufacturers, in the form of lower electricity prices, which mutes electricity price changes.

WRI estimates that facilities in 10 of the 13 chemicals subsectors (as a whole) would be eligible to receive free allowance rebates under the APA. For these eligible subsectors, WRI expects no net compliance obligations—at the subsector level—in 2016 and through as far as 2033 (see WRI’s accompanying technical document). WRI expects only facilities in three of the 13 subsectors examined— the industrial gas, ethyl alcohol, and phosphatic fertilizer— would not be eligible to receive free allowances since these subsectors don’t meet the legislation’s threshold for trade exposure and or energy-intensity.

WRI compared the 13 GHG-intensive subsectors’ relative policy-related energy and compliance costs (based on EIA projections in 2016) against Standard & Poor’s ranking of relative competitive risks for each subsector (see Figure 1). WRI assumed that the ratio of these subsectors’ emissions and their energy-related fuel/feedstock purchases to their size, as measured by value of shipments, is the same in 2016 as in 2006 (the most recent data available for emissions estimates). This comparison appears to indicate the following:

While large energy-intensive commodity chemical subsectors (like the petrochemical, plastic material and resin, and other basic organic chemical subsectors) may have limited ability to pass along costs depending on market conditions, WRI doesn’t expect these subsectors to face significant compliance costs because of their eligibility for free allowances. At the same time, these subsectors also depend heavily on natural gas-derived feedstocks so they could face higher production costs. Standard & Poor’s expects higher production costs could make some of these subsectors less competitive in their markets, lower their export opportunities, and ultimately weaken their credit metrics.
The nitrogenous fertilizer subsector is likely to face moderate energy-related risks because of their natural gas purchases.
The industrial gas subsector may have the greatest compliance costs relative to its size, but it should also be in the best competitive position to pass along these costs to customers.

Figure 1: Estimated Relative Impacts on Select Manufacturing Subsectors under the American Power Act

Company-level evaluation

Under the APA, companies in eligible subsectors receive free allowances based on their market share (by output) in a subsector, multiplied by the whole subsectors’ GHG emissions. As a result, companies with a lower ratio of GHG emissions to output than those of their peers would receive more free allowances than required to cover their facilities’ compliance requirements. These companies can sell their extra free allowances for cash or bank them for future use. Companies with a higher ratio of GHG emissions to output than their peers still receive free allowances, but these free allowances would only offset a portion of their compliance requirements and may put them at a cost disadvantage.

WRI and Standard & Poor’s expect that the credit impact at a company-level would likely vary within each subsector based on the following:

Current and projected emissions and the ability to reduce emissions. For companies eligible to receive free allowances, emissions data should be compared with the subsector average, since net compliance costs would depend on emissions intensity relative to the subsector average.
Current and projected fuel and feedstock mix. Dependence on GHG-intensive fuels like petroleum products and coal (and to a lesser extent, natural gas) increase compliance costs because GHG emissions are released upon combustion. Natural gas dependence, whether through direct purchases or natural gas-derived feedstocks, may result in higher energy purchase costs.
Competitive position, both domestic and international, including the ability to pass along costs.

Standard & Poor’s examined the potential credit impact on two hypothetical companies in energyintensive subsectors in 2016, using EIA projections of the APA and WRI’s analysis of free allowances:

Company A is a large carbon black producer with lower GHG emissions than most of its peers. WRI estimates that the value of free allowances Company A would receive under the APA would be greater than the costs of its compliance obligations, resulting in net revenue of $0.01 to $0.03 per dollar of U.S. sales in the first year of regulation—a negligible positive impact. Standard & Poor’s also expects the implications of raw material costs to be manageable for Company A because it focuses its energy purchases on refined crude oil products, which are expected to decline in cost relative to the no-policy case. Even in the downside case, where its energy outlays increase more than what the EIA projects, energy costs appear manageable because of the company’s geographic diversity and the expectation that Company A would retain sufficient pricing power due to the valueadded- nature of its products and favorable industry structure. Thus, under the EIA projections, Standard & Poor’s would not expect Company A’s profitability and leverage metrics to deteriorate.
Company B, as a large industrial gas producer, would not be eligible to receive compliance-related subsidies. As a result, WRI estimates Company B would face $0.06 to $0.17 in compliance costs per dollar of U.S. sales. The substantial costs of compliance could raise some uncertainty on future capital spending, and the EIA’s projection for slightly lower economic growth could affect demand growth. But we expect Company B to be able to pass through some costs to downstream customers as a result of the strength of its business model and lack of lower-cost substitutes. Here, Standard & Poor’s expects Company B’s profitability and leverage metrics to deteriorate modestly under the EIA projections.

The subsectors that are most likely to face EPA regulation

WRI believes that 2016 is likely the earliest year that future EPA regulation would cover GHGs from existing chemical facilities. The form of regulation is unclear. Previously, the EPA has used both market-based and command-and-control regulation to limit pollutants.

WRI believes that absolute emissions and emissions reduction potential are among the factors that the EPA will consider when regulating GHG emissions; other key criteria include cost feasibility and the remaining useful life of facilities (see Figure 2). Nitric acid and adipic acid production—part of the nitrogenous fertilizer and all other basic organic subsectors, and an input into fiber manufacturing—are also likely to come under regulation as a significant source of nitrous oxide (N2O) emissions (a potent GHG). (Because of data limitations, Figure 2 does not reflect cost feasibility, the remaining useful life of facilities, and nitric acid and adipic acid production.) Figure 2: Relative Likelihood of Future EPA Regulation for Select Chemical Manufacturing Subsectors

The credit differences between policy scenarios

Assuming the EPA does not use market-based mechanisms, WRI and Standard & Poor’s believe the key credit-related differences between the cap-and-trade and EPA regulatory scenarios include:

Cash flow flexibility. Cap-and-trade legislation provides companies with greater flexibility to choose between up-front capital expenditure and the purchase of emissions allowances, allowing companies to more easily manage cash flows in a given year.
Compliance-related revenue. Under the APA, companies that are both eligible for rebates and emit less GHGs than their peers (per unit of output) would presumptively receive more free allowances than required, and could bank or sell these allowances for cash. A non-market-based EPA regulatory approach would not provide a similar opportunity to gain compliance-related revenue.
Management strategy. Implementing an effective management strategy to comply with climate policy becomes more important in a cap-and-trade scenario. Benchmarking emissions reductions against peers and participating in GHG permit trading (“carbon”) markets will likely be a complex undertaking for any company, requiring input and coordination from all business segments. In contrast, meeting EPA regulatory standards is likely to be easier to manage within existing company operations.

As climate policy evolves, key policy variables to watch for include:

Stringency. How aggressively do policies target greenhouse gas emissions reductions?
Coverage. Which subsectors in the chemicals value chain do the regulations cover? And how and when do those regulations apply?
Transition provisions. What provisions are available to ease the economy and companies into reducing GHG emissions and minimize competitive pressures (for example, free allowances)?

Bottom Line on Emerging Solar Metering Policies

admin — Thu, 27 Jan 2011 13:25:16 -0500

Inflexible metering procedures limit the types of customers who can invest in solar electric power, and the scale of systems. New policies for virtual net metering, community solar, and meter aggregation can make solar more economical and accessible.

Virtual Net Metering

What is virtual net metering (VNM)?

Net metering allows utility customers with on-site renewable electricity generating systems to receive credits for excess electricity that is sent to the grid and to later use those credits to offset their electricity bill, or receive outright payment for them.1 In contrast, virtual net metering (VNM) allows multiple customers (with their own discrete meters) to share the net metered credits from a system without rewiring to physically link their meters to the system. Specific rules vary by state, and even by utility. Virtual net metering policies are currently most often available to owners and/or operators of multi-tenant buildings, or to a group of buildings within a small contiguous geographic boundary. Typically, the system must located “behind” (on customer side of) the meter of at least one of the utility customers credited and/or the customers credited must be located within the same facility where the system is installed.

For example, a low-income housing building owner could install a solar PV system where the power flows through a single meter and feeds directly back into the grid. The utility would allocate the credits for the kilowatt-hours received to each tenant’s individual utility account based on a pre-agreed percentage sharing scheme. While VNM customers sharing an electricity generation source do need to be in the same utility territory, they do not need to be under the same rate schedule in most states.

Which states allow for virtual net metering?

California
Colorado
Delaware
Maine
Massachusetts
Rhode Island
Vermont

How does virtual net metering facilitate new customer participation?

Currently, virtual net metering is most often available for occupants of multi-tenant buildings, low-income housing, municipal buildings, and to groups of buildings in contiguous proximity to the solar installation. Without VNM, separate tenants with a solar investment on their building’s roof would each have to be physically connected to the system to receive net metered credits on their separate utility bills. This is cost-prohibitive and logistically difficult.

What is “community solar”?

Community solar programs and policies facilitate joint ownership or sponsorship of a generating system, and sharing of the benefits even when the power itself cannot be physically shared. It can make solar accessible to owners of property that cannot accommodate a solar PV array and those prohibited from entering into legal ownership structures typically used for solar, among others.

Policies and incentives vary from state to state, thus there is no one standard community solar model. According to a publication of the National Renewable Energy Lab, three project models are currently the most common:

Utility-Sponsored Model: a utility owns or operates a project that is open to voluntary ratepayer participation;
- United Power, an electric co-op in Colorado, offers the option to lease panels at its Sol Partners Cooperative Solar Farm for a fixed upfront fee. In return, payment for the kilowatt-hour (kWh) production is credited to their account at a “community solar” rate higher than the retail rate.
Special Purpose Entity (SPE) Model: individual investors join in a business enterprise to develop a community solar project;
- In Maryland, a group of investors formed the University Park Community Solar LLC to invest jointly in a system located on the roof of a local church. Owners share the revenues from power sales to the church, as well as from incentives.
Non-Profit “Buy a Brick” Model: donors contribute to a community installation owned by a charitable non-profit corporation. [Donations may be tax deductible, but there are no financial benefits shared, and in fact this does not require special policy.]
- The East Portland Community Center project was funded by local businesses through the “Solar 4R Schools” program. The non-profit program installs solar systems and uses them to educate communities about solar power.

Community solar models often aim to reduce the high upfront costs of solar, sometimes allowing participants buy into the program’s installation(s) monthly or per kWh. Their contribution then entitles them to receive payments for the system’s production, and can fix the price for a portion of their bill to protect against future price increases.

Where is community solar allowed?

The following states allow at least one of the community solar models listed above:

Arizona
California
Colorado
Delaware
Florida
Illinois
Maine
Maryland
Massachusetts
Utah
Washington

Meter Aggregation

What is “meter aggregation”

Meter aggregation allows for allocation of the credits from a solar electric system to meters in buildings separate from where the actual power is produced, if they are on the same customer’s utility account. It is usually reserved for buildings located in a tight geographical boundary, either adjacent to one another or located no more than a few miles from one another. It can be done physically, which may require additional equipment, or virtually.

Often, net metering policies limit the amount of power that a customer can sell back to the grid to less than a set percentage of their annual consumption. The benefit of meter aggregation is that several facilities’ metered annual consumption is aggregated; thus the owner can install a larger system and sell more power back. Meter aggregation is often used in agricultural operations or business campuses where there are multiple separate facilities with the same owner.

Summary

In summary, net metering, virtual net metering, community solar, and meter aggregation can be characterized as follows:

Net metering: allocation of benefits to one customer via one meter;
Virtual net metering: allocation of net metered energy credits denoted in kWh to multiple customers with separate meters, often system located on their site or nearby;
Community solar: allocation of benefits across meters of multiple customers who may or may not be near and/or own some part of the generating system, and
Meter aggregation: allocation of system benefits to multiple meters of one customer.

First International GHG Protocol-based Programs Workshop Report: Key Challenges and Recommendations

Maggie Barron — Mon, 29 Nov 2010 15:46:22 -0500

Introduction

Corporate GHG inventory programs have played a significant role in encouraging and enabling businesses and other organizations to respond to climate change. By developing and disseminating standards and tools to formulate inventories that are consistent with international best practices, these programs have laid a foundation of technical and institutional capacity to measure and manage GHG emissions. In so doing, they have also promoted transparency and access to information by making GHG data publicly available in GHG registries and mobilized coalitions of private sector actors to engage constructively on the climate issue.

This progress notwithstanding, new developments are driving the need for GHG accounting programs to evolve more efficiently, more effectively, and at a greater scale. On the business side, there is a trend toward managing GHG emissions along the value chain. Companies are looking up and down the supply chain and throughout the product life-cycle for GHG management opportunities. Identifying these opportunities requires exponentially more extensive GHG data than is now readily available. Further, climate policy is becoming a reality not only in industrialized countries, but also in growing numbers of developing countries around the world. Most major emerging economies have adopted voluntary national GHG mitigation targets and are exploring portfolios of policies and measures to achieve them. International negotiations have emphasized the need for mitigation to be measurable, reportable, and verifiable, which has called new attention to the importance of GHG accounting. These trends point to the need for greatly enhanced GHG accounting capacity and tools at a global scale. Existing GHG inventory programs have a tremendous potential to inform a global strategy for building this capacity.

In March 2010, the World Resources Institute (WRI) convened a two-day meeting of approximately 50 experts from more than ten GHG inventory programs around the world to share lessons learned and discuss opportunities for collaboration. The event was organized around six major themes: accounting and quantification, reporting and public disclosure, quality assurance, training and capacity building, going beyond the inventory, and the relationship between voluntary programs and climate change policy. Participants generated several recommendations for advancing work in these areas (see Appendix 1).

While the discussion and suggestions covered a wide range of topics, taken together, they point to a need to develop future work in three areas: (1) dramatically increasing the scale of corporate GHG accounting capacity in terms of geography, sector, and scope; (2) moving companies and governments along the path from GHG measurement to GHG management; and (3) enhancing the coordination between programs on a range of issues as GHG accounting practice becomes more widespread and complex.