REI Solar Energy Program Case
Overview
REI (Recreation Equipment Inc) is a co-operative outdoor equipment store. It has a strong stewardship mission (https:
www.rei.com/stewardship), which makes sense since its equipment is mostly for outdoor activities. Its approach to energy is:
Sustainable energy use is part of protecting the outdoors. We take a straightforward approach:
· Seek to use less energy through good building design and energy-efficiency measures.
· Generate our own energy (e.g., rooftop solar panels).
· Contract directly with utilities for long-term renewable energy.
· If needed, commit to purchasing Green-e® certified renewable energy certificates for the remainder of our energy from the grid.
Source: https:
www.rei.com/stewardship/climate-change
In 2008 REI made its first investment in PV solar, equipping 11 stores with panels. This case is set in 2011, when RIE is considering expanding its investment in PV solar. The case discusses the method that REI financial analysts use to complete the capital budgeting analysis.
About REI's Ca
on Footprint
REI's goal is to be ca
on neutral in its operations by 2020. Here are two graphs from its website that track its progress. These are for today, not 2011, so are not entirely relevant to the case. In case you cannot read the methodology image, you can find it at (See attachment REI Footprint Methodology).
It is important recognize that REI has, as of 2018, done about as much a possible internally to reduce its GHG (greenhouse gas) emissions. Notice that remaining emissions are from third-party transportation (employee commuting, product transport to REI then to customers). You might think that REI has some control over how its employees get to work but changing people's behavior in this realm is hard. Everyone is busy and have a
anged commuting to be as efficient as possible for their sets of demands (kids to school, doing e
ands on the way home from work, leaving at the last minute to have more sleep time, more daily time, etc.) Supporting this notion is a Harvard Business Review article (See attachment).
Background on Ca
on Footprints:
The standard that most companies use to calculate their ca
on footprint is based on the Greenhouse Gas Protocol's Corporate Accounting and Reporting Standard (See attachment ghg protocol). It covers 7 greenhouse gases or families of gases. They are:
· ca
on dioxide (CO2)
· methane (CH4)
· nitrous oxide (N2O)
· hydrofluoroca
ons (HFCs)
· perfluoroca
ons (PCFs)
· sulfur hexafluoride (SF6)
· nitrogen trifluoride (NF3).
The GHG Protocol approach separates emissions into 4 scopes.
Scope 1 are emissions from fuels used in company assets. Examples are gasoline used in cars or trucks, kerosene used in planes, natural gas used in boilers or furnaces. The key is that the company buys the fuel and combusts it in its owned or leased assets where the emission then occurs. Clearly, Scope 1 emissions are totally under the company's control since it can choose its assets (think cars, trucks, HVAC systems, etc.) that are more or less efficient, and it also determines how much those assets are used.
Scope 2 emissions are primarily the emissions from the generation of electricity that the company uses. In some place’s companies buy steam, so the emissions from generating steam that is transported and sold to companies can be another source of Scope 2 emission. Mostly, though, it is electricity generation that is associated with Scope 2 emissions.
Scope 2 emissions are further divided into market-based and location-based emissions. This is a little bit of a stylized interpretation, but it is close to actual one. Location-based emissions are the emissions if all the electricity the company used was
ought from the utilities serving the company's various locations. Different regions use different mixes of fuel to generate electricity. In the NW there is lots of hydropower, so a KwH of electricity has very low CO2 emissions. In Colorado there is still coal used, especially if the power is from Tri-State (but that is changing). Here are data from EPA's most recent eGrid database (See eGrid attachment) based on 2018 data.
State
CO2 lbs/KwH
AK
0.91
AL
0.86
AR
1.21
AZ
0.97
CA
0.42
CO
1.36
CT
0.51
DC
0.44
DE
0.90
FL
0.94
GA
0.93
HI
1.51
IA
1.07
ID
0.16
IL
0.81
IN
1.74
KS
0.99
KY
1.82
LA
0.84
MA
0.73
MD
0.84
ME
0.26
MI
1.11
MN
1.00
MO
1.70
MS
0.92
MT
1.16
NC
0.80
ND
1.51
NE
1.41
NH
0.30
NJ
0.50
NM
1.33
NV
0.74
NY
0.42
OH
1.32
OK
0.89
OR
0.31
PA
0.78
RI
0.87
SC
0.63
SD
0.52
TN
0.74
TX
0.98
UT
1.60
VA
0.74
VT
0.05
WA
0.20
WI
1.39
WV
1.95
WY
2.05
U.S.
0.95
Location-based Scope 2 emissions would compute emissions as if electricity came from the grid using emissions from the suppling utility.
Market-based Scope 2 emissions are the actual emissions that occu
ed over the reporting period, usually one year. These can differ from location-based emissions because companies can establish PPAs (Power Purchasing Agreements) with a wind farm to buy renewable energy or it can generate its own electricity from roof-top solar. Usually market-based emissions will be less than location-based emissions.
You might ask why bother with this location versus market distinction. It is a way for companies to show how their procurement activities have affected their ca
on footprint. By having a standard for the two types of Scope 2 emissions it lets interested parties see whether a company is pro-active about reducing its CO2 emissions.
Finally, Scope 3 emissions are everything else. The REI pie chart gives good examples of the most common Scope 3 emissions: transport of goods by third party contractors, employee travel, and employee commuting. What isn't included are GHG emissions from the production of products by suppliers, the emissions from the use of the product, emissions from the disposal or end-of-life treatment of the product, emissions from land use activities like deforestation, emissions from livestock (largely methane) and probably a bunch of other sources that are sector-specific.
Assignment
The case must include the sections: Executive Summary, Statement of Problem, Analysis, and recommendations. The case presents the analysis of the Phase 2 PV solar investment in Exhibit 6. It is based on the discussion in the case and Exhibits 3, 4, and 5. The end result are several IRRs for different assumed project time horizons. These range from -5% to 17% depending on the time horizon used. IRRs are used because there was no discount rate given. Of course, to decide if an IRR is acceptable you have to have an implied discount rate to use as a hurdle rate: If the IRR is greater than the hurdle rate the project is acceptable.
For this assignment I would like you to read through the methodology used and revise or confirm the analysis. Here are some things to think about to get started. You may identify other issues that would suggest a revision in the Exhibit 6 analysis.
· Is the electricity price co
ect?
· Is the price inflator co
ect?
· What about the other inflation assumptions?
· How much have electricity prices changed in the last 10 years?
· REI had to give the RECs to the utility. Can REI still say it is lowering its ca
on footprint?
· Should the energy savings be taxed?
· What is the appropriate time horizon?
· REI has stores in many states. Is this blended or average analysis the best approach?
Once you have identified what you think are the right set of assumptions, revise the financial analysis in Exhibit to reflect your assumptions.
In a report of about 3 pages, explain your assumptions (maybe in a bulleted list with the topics in my list above) and why they are better than those used in the case. If you liked a case assumption, say so. Conclude your report with the IRR you computed and compare it to those in the case (-5% to 17%). Finally, explain what your result means in terms of REI's decision to pursue this investment. In an appendix (beyond the 3-page limit) show your revised analysis. A 20-year spreadsheet will be difficult to fit onto a page, so show years 1-7 and 19 and 20 (Leave out years 8 through 18). In MS Word you can insert a Section Break (New Page) then change the page format from portrait to landscape to get more width. Make sure the table is readable.
Contents
Table of Contents
fo
eGRID2018_Data_v2.xls
eGRID2018 Unit, Generator, Plant, State, Balancing Authority Area, eGRID Su
egion, NERC Region, U.S., and Grid Gross Loss (%) Data Files
March 9, 2020 Fe
uary 27, 2020 Fe
uary 27, 2020 Fe
uary 27, 2020 Fe
uary 27, 2020 Fe
uary 27, 2020 Fe
uary 27, 2020 Fe
uary 27, 2020 Fe
uary 27, 2020 Fe
uary 27, 2020
Sheet Name Description
1 UNT18 Unit year 2018 data
2 GEN18 Generator year 2018 data
3 PLNT18 Plant year 2018 data
4 ST18 State year 2018 data
5 BA18 Balancing authority area year 2018 data
6 SRL18 eGRID su
egion year 2018 data
7 NRL18 NERC region year 2018 data
8 US18 U.S. year 2018 data
9 GGL18 Grid Gross Loss (%) year 2018 data
Updates to eGRID2018v2
• CH4 and N2O input emission rates and fuel specific emission rates updated to co
ect values for the plant, state, balancing authority, eGRID su
egion, NERC region, and U.S. levels.
• The plant unadjusted annual Hg emissions source has been updated to the co
ect value (previously stated EPA/CAMD for all plants when it should have been "--").
• A typo in the listed conversion factor for MWh to GJ was corected on the Contents page (this did not affect any eGRID calculations).
Feedback
Customer Satisfaction Survey
Contact EPA
Color Coding Legend
Category Color Link to sheet and category
1) Annual Values (generation, emissions, and heat input) GEN PLNT ST BA SRL NRL US
2) Unadjusted Annual Values (emissions, and heat input) UNT PLNT
3) Adjusment Values (emissions, heat input, heat rate) PLNT
4) Output Emission Rates (emissions per MWh) PLNT ST BA SRL NRL US
5) Input Emission rates (emissions per MMBtu) PLNT ST BA SRL NRL US
6) Combustion Output Rates (emissions per MWh) PLNT ST BA SRL NRL US
7) Generation by Fuel Type (MWh) PLNT ST BA SRL NRL US
8) Renewable and Non-Renewable Generation (MWh) PLNT ST BA SRL NRL US
9) Combustion and Non-Combustion Generation (MWh) PLNT ST BA SRL NRL US
10) Resource Mix (percentages) PLNT ST BA SRL NRL US
11) Renewable and Non-Renewable Resource Mix (percentages) PLNT ST BA SRL NRL US
12) Combustion and Non-Combustion Resource Mix (percentages) PLNT ST BA SRL NRL US
13) Output Emission Rates by Fuel Type (emissions by fuel type per MWh) ST BA SRL NRL US
14) Input Emission Rates by Fuel Type (emissions by fuel type per MWh) ST BA SRL NRL US
15) Nonbaseload Output Emission Rates (emissions per MWh) ST BA SRL NRL US
16) Nonbaseload Generation by Fuel Type (MWh) ST BA SRL NRL US
17) Nonbaseload Resource Mix (percentages) ST BA SRL NRL US
Notes
Values in parentheses are negative numbers.
Dashes (-) are zeroes.
Conversion Factors
1 megawatt-hour (MWh) 1,000 kilowatt-hour (kWh)
1 short ton 2,000 pounds (lb)
XXXXXXXXXXshort ton 1 metric ton
2.2046 lb 1 kilogram (kg)
0.9478 MMBtu 1 Gigajoule (GJ)
1 MWh 3.6 GJ
Citation
United States Environmental Protection Agency (EPA). 2020. “Emissions & Generation Resource Integrated Database (eGRID), 2018.” Washington, DC: Office of Atmospheric Programs