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What are Environmental Solutions?

Some of our customers need to acquire renewable energy, while others have emissions profiles to manage.

Similarly, project developers need to manage the price risk associated with the environmental attributes they create, and Shell Energy has the environmental solutions to meet these needs.

Environmental products can be divided into two main groups:

  1. Emissions-related products, e.g. allowances and offsets
  2. Renewable energy-related products, such as Renewable Energy Credits and structured renewable power hedges

Products offered by SENA include renewable energy, Renewable Energy Credits (RECs), carbon allowances and offsets, and allowances for sulfur dioxide (SO2) and nitrogen oxides (NOx).

For example, on the supply side, Shell Energy has provided long term price certainty to wind farms and landfill operators by offering a forward fixed price for the energy produced. We were able to offer a premium over typical prices for power or natural gas because of the value of the environmental attributes created by these facilities. In addition, we have supported innovative projects that reduce emissions of greenhouse gases, including biomass, waste water treatment, composting, hydropower production, and cogeneration.

On the demand side, we have provided utilities and municipalities with renewable energy to meet their state renewable targets. We have also helped some of our customers develop innovative products with a lower environmental footprint by sourcing RECs and offsets that meet their specific needs.

Renewable Energy

What is a Renewable Energy Credit (REC)?

A REC represents the environmental attributes associated with one-megawatt hour of electricity production by a renewable facility. RECs are often used in state compliance markets – retail electricity providers that have to ensure a certain percentage of their power supply is renewable can often buy RECs to meet this obligation. In addition, RECs represent a mechanism by which electricity customers can voluntarily support renewable power generation.

Each REC purchased ensures that one-megawatt hour of renewable electricity has been put onto the grid, and the purchaser of that REC is entitled to claim ownership over the associated renewable attributes.

Are RECs applicable everywhere?

Many renewable markets in the US and Canada now support the use of RECs to demonstrate ownership of renewable power.

However, some states require the environmental attributes represented by the REC to be bundled with power, requiring a more integrated approach to managing the attributes, power and any transmission requirements (e.g. in California and Massachusetts).

Shell Energy is active in almost all of the pure REC markets, but also offers bundled solutions for both power and any embedded environmental attributes. For example, we have arranged for renewable energy generated outside of California to qualify for California’s Renewable Portfolio Standard, providing a renewable energy source for utilities. We have also done similar deals in New York and New England to maximize the value of any environmental attribute.

What kinds of attributes are included in a REC?

There are many different attributes that buyers find important when they support renewable generation. As their name implies, these products use an infinite source of energy to generate electricity, for example solar, hydro, wind, geothermal, etc.  These energies have low or zero emissions, particularly local air pollutants like SO2, NOx and greenhouse gases that contribute to climate change. In addition, renewable generators are often located in remote parts of the country, providing jobs and growth opportunities to rural economies.

How much of the money that North American consumers pay for RECs goes to fund clean energy initiatives?

The markets for RECs often involve independent power developers that build renewable facilities. When a developer is looking to build a new renewable project, the monies received from prior REC sales often help make the case for future expansion. In addition, a healthy forward REC market (with price transparency and deep liquidity) can be relied upon by the developer to lock in a price for any future RECs produced before the project is built.

In some cases, a forward sale of RECs is a prerequisite for the developer in securing debt financing for the project. In others, project developers do not pre sell the RECs, but still rely on their value to determine the economic feasibility of the project.

Does the money paid for RECs by consumers in a particular state/province go to funding clean energy initiatives within that state/province?

It can. If required, Shell Energy North America can obtain RECs from facilities only within a certain state/province. In addition, we can often specify the type of facility (e.g. hydro, wind, etc.)

Are there any kinds of national, rather than state-mandated, standards for these types of products?

There are two main standards in the voluntary markets: Green-e for the US and EcoLogo in Canada. There are no federal targets for renewable generation at this time.

Are RECs from a generator in one state or province valid for use in another state or province?

Depending on the intended application, it is sometimes possible to use RECs generated in one state or province in another. In state compliance markets, the specific rules of the program will tell you whether or not this is possible. In the voluntary markets, this is often up to the buyer. Many buyers like to match the generation location of their RECs with their load (e.g. Alberta RECs for Alberta power load), but this is not always necessary or possible.

Are there wholesale versus retail RECs (i.e. those available to utilities versus individual consumers/businesses)?

Generally anyone can purchase a REC, whether they are a residential consumer, a utility or a large industrial facility. The concept is the same, matching users of renewable power with generation of that power.
In some markets, state-specific rules do not permit the use of RECs to meet certain requirements. For example, the investor-owned utilities in California cannot use RECs to meet their state renewable energy targets. However, it would be possible for them to purchase RECs for any voluntary program that went above and beyond their statutory obligations.

Carbon Credits

What is a carbon credit/allowance/offset?

A carbon credit/allowance/offset represents one metric ton (a tonne) of greenhouse gas emissions reductions. A carbon credit or surplus allowance is generated when an entity reduces its emissions beyond that required by law. The purchaser of that credit/allowance can then apply it against its own emissions.

1 Carbon Credit = 1 ton greenhouse gas emissions

Strictly speaking, there is a difference between a carbon allowance and a carbon offset.. Allowances are usually set by governments as part of a cap and trade program and issued to industry sectors and/or facilities under the cap.

They represent in essence emissions permits and are required in order to comply with the program. Facilities have to hold allowances at least equal to their emissions level.

Offsets represent emission reductions that have been achieved outside of the capped sector. Depending on the rules of the program, offsets are often used by entities under the cap as an alternative compliance mechanism to submitting allowances. Offsets, credits and allowances can be used in the voluntary market to substantiate emission reduction claims. In other words, for companies that want to mitigate their own carbon footprint, but are not required to do so, purchasing allowances, offsets or credits can help offset the company’s own emission profile.

Are there currently any opportunities in the North American market for consumers to purchase carbon credits or similar certificates?

Absolutely – North American consumers can purchase both carbon credits and allowances. Carbon credits include Verified Emission Reductions (VERs), which are verified against one or more of the voluntary standards that exist in the market place, or Certified Emission Reductions (CERs), the credits certified by the United Nation’s Executive Board for use under the Kyoto Protocol.

Carbon allowances in the US exist by nature of the Regional Greenhouse Gas Initiative (RGGI), a cap and trade program in the northeast – anyone is entitled to purchase and retire these allowances.

Can a company hedge its future carbon liability today?

There are some innovative products that have been recently released to build a market for US federal carbon allowances ahead of any compliance program. For example, the Chicago Climate Futures Exchange has launched a futures contract on allowances usable under a future US federal market. Traded volumes of these products are currently not very large, but as the markets develop, we expect products like these to offer an effective way for companies to manage their future compliance obligations.

What does it mean to retire a credit/offset/allowance?

Retiring a credit/offset/allowance refers to withdrawing it from circulation so that no one can claim its benefit in the future. In a compliance market, credits/offsets/allowances are retired by submitting them to the applicable regulatory body. In the voluntary markets, they can be retired on one of the registries that exist to track emission reductions.

What is the difference between a Certified Emission Reduction (CER) and a Verified Emission Reduction (VER)?

A CER is certified by the United Nation’s Executive Board and can be used by companies and countries to meet Kyoto Protocol commitments. A VER is not issued by the UN’s executive board, rather it is verified (audited) by a third party against a particular standard.

There are many standards in the market place today. Some are modeled after the methodologies used under the Kyoto Protocol’s Clean Development Mechanism (CDM), the program that encourages emission reduction activities in the developing world. However, there are also methodologies developed for the emerging compliance programs in North America, for example the Regional Greenhouse Gas Initiative in the northeast, and Alberta’s program.

Why would a company purchase one over the other, and how does their pricing compare?

As of March 2009, CERs are priced higher than VERs. European companies can use CERs for a portion of their compliance requirements, and this additional demand tends to drive up pricing. So price is one consideration.

Other considerations are the type of project (not all projects are covered under the Clean Development Mechanism process), and the geographic location of the project (projects in Canada and the US cannot become CERs).

What would be the benefits (long-term, short-term) of purchasing a VER or CER before a regulated market is developed?

Many companies are buying offsets as a part of a corporate environmental commitment. Others are buying them in support of new environmentally conscious lower-impact products. A few are starting to buy offsets with the hope that they may be eligible for compliance going forward. So there are a number of reasons for buying VERs or CERs – the choice depends on the specific motivations and objectives.

Can companies in North America currently earn VERs or CERs by undertaking projects that reduce their greenhouse gas emissions beyond the levels required by law? How would this be done?

Yes and no. They can earn VERs, but not CERs. CERs can only be generated in so-called non-Annex I countries (typically those with developing economies).

The process to generate a VER starts with the identification of a project to reduce emissions that is not required by any law or regulation. The next step would be to call someone like Shell Energy North America – we can walk a company through the different standards that may be applicable, the requirements that might exist for verification under that standard, and give a sense of the value of any emission reduction revenue stream achievable.

Why would an organization be interested in voluntary credits when all this will do is increase the cost of its product?

Environmental concerns are becoming increasingly important to companies – consumers expect companies to be good corporate citizens, and to take steps to mitigate their impact on the environment. The phenomenal growth of organic foods is a good example of this. Over the short term, voluntarily reducing emissions or offsetting them with carbon credits may be more expensive. But in the longer run, many companies are realizing that it makes good business sense to factor in consumers’ environmental concerns when setting corporate strategy and developing new product lines.

As an energy consumer, how does one identify internal emission reduction opportunities?

Greenhouse gas emissions are closely correlated with energy consumption, so any project that reduces energy consumption will likely reduce emissions. However, there are other non-energy GHGs that do not correlate well with energy consumption, the most common being methane, nitrous oxide, sulfur hexafluoride, HFCs, and PFCs. Projects that reduce these emissions may also be eligible for carbon credits.

Can RECs be used for carbon credits and vice versa?

In certain circumstances, RECs can be used to offset a company’s carbon emissions. In the voluntary world, most industry organizations recommend using RECs to offset carbon emissions associated with electricity consumption only. However in certain compliance markets, renewable projects can be used to generate carbon credits (e.g. Alberta)

Carbon credits cannot be used to make renewable energy claims, since they only apply to greenhouse gas emissions. A central tenet of a REC is that they represent electricity generation from a renewable fuel source.

Why would one buy carbon offsets rather than RECs?

If climate change is the only concern, carbon offsets are fine. If the intention is to support a renewable energy supply, RECs are more appropriate.

Carbon Constraints

How has Shell’s experience in the European carbon markets and US NOx and SO2 markets made them better able to deliver superior products and services in North America?

The North American carbon markets are currently illiquid, susceptible to regulatory risk, and can be complicated to navigate. Over time, as the markets develop, we will see more liquidity and greater depth, much like that experienced in the European Union’s (EU) Emissions Trading System (ETS).

SENA’s experience with US SO2 and NOx emissions markets, as well as renewable energy credits – allows us to tread carefully through the carbon world, and help our customers do the same.

Shell was the first company to execute a transaction on EU Allowances, two years before the start of the ETS in 2005. We were also the first company to take delivery of Certified Emission Reductions under the Clean Development Mechanism, the program that encourages emission reductions in developing economies.

Since then, we have built a sizeable presence in the European carbon markets, and continue to develop new products to meet our customers’ needs. Many of these concepts will translate well in North America. For example, we were the first company to transact a futures contract on the Chicago Climate Futures Exchange on allowances usable under a future US federal cap and trade program, a reflection of our intention to continue this leadership position in these new markets.

Does market experience with similar products help determine any future trend with RECs or Carbon Credit markets?

To a certain degree, yes. Many environmental markets exhibit similar characteristics, especially during the early stages of any program. So experience in other markets can help. However, environmental markets can correlate poorly with other energy commodities (e.g. natural gas, oil, etc).

How do you think a North American carbon market would differ from those in Europe? How might it be similar? How long do you think it will be before a carbon market is established in North America?

For many, there are a lot of reasons to have North America linked to other markets, especially in Europe – the larger the pool of participants, the greater the emission reduction opportunities, and the cheaper it will be to comply. However, it is likely that we will see separate markets, at least initially, with some significant differences.

For example, in Alberta, an emission intensity approach was favored over fixed caps on absolute emissions levels. This allows for economic growth, but makes it much harder to predict future emissions levels. In the US, we are seeing a trend towards auctioning carbon allowances, which are the permits companies need to demonstrate compliance. In Europe and in the US SO2 program, these permits are currently issued to affected facilities for free.

Does Shell support the carbon tax model? Why or why not?

Shell supports market-based mechanisms to combat climate change whenever practical. We believe flexibility of cap-and-trade programs can help companies achieve emissions reductions at the lowest cost. The problem with a tax is that although it gives you price certainty on emissions; it does not guarantee a particular emission reduction level (this can only be modeled).

Is a government-run approach better than a market-determined approach for participating organizations?

Shell’s general view is that companies are better at making decisions around where to deploy capital to reduce emissions. In certain circumstances (for example large infrastructure projects), public/private partnerships may make sense, but for the most part, companies should be part of the solution.

Do you believe the eventual carbon market should be mandatory or voluntary?

It is likely that the two will co-exist. There are many parts of the economy for which a price on carbon is needed to stabilize and reduce emissions and avert the catastrophic consequences of climate change. However, some organizations will always want to do more than that required by law, for whatever reason. A healthy voluntary market can co-exist with a mandatory market.

Shell and Alternative Energy

What products does Shell provide to assist industrial consumers in reducing their carbon footprint and offsetting greenhouse gas emissions?

There are two main ways Shell can help companies with their carbon footprint. We have consulting groups within Shell Global Solutions that can help a facility quantify its energy consumption and look at ways to reduce fuel consumption, and hence lower their emissions.

For companies for which it is too expensive to reduce their own emissions, Shell Energy North America can offer carbon credits (reductions of greenhouse gas emissions achieved by third parties). These can either be voluntary offsets or certified credits under the Kyoto Protocol’s Clean Development Mechanism.

Looking further down the road, Shell is a global energy company, and we spend millions of dollars a year on research and development into clean burning fuels with lower carbon footprints. For example, we have an equity interest in a second-generation ethanol production plant that uses cellulosic waste (e.g. the stalks of plants) to generate fuels. This is a demonstration plant at the moment, but it should be moving to commercial production over the next few years.

Does Shell use clean energy in any of their production processes?

Shell is constantly looking for ways to incorporate clean energy into its production processes. Much of this is being driven by our voluntary commitment to cap our emissions of greenhouse gases to 5% below 1990 levels by 2010. For example, our Caroline Low Pressure Steam Project now takes excess steam produced from processing sour natural gas and generates over 10MW of electricity to help power our facilities. Previously the Alberta-based plant was reliant on grid power, which is heavily coal based.

What is Shell doing to move the world to a more responsible energy supply?

Shell has a number of business initiatives looking at alternative energy supplies.

How can Shell be promoting environmental products when they have their own environmental challenges?

One company or country alone will not solve climate change and other environmental concerns. It takes everyone working together to mitigate our impact on the environment. Currently, Shell’s energy portfolio is heavily focused in oil and natural gas products that have helped fuel our economies for over a century. Over time, society needs to reduce its reliance on fossil fuels, but this cannot happen overnight.

It will take time to develop new technologies and modify our infrastructure to incorporate new forms of energy. We are doing our part to foster the growth of these new technologies and environmental markets. There is a lot more to do, but it is a step in the right direction.

RELATED LINKS

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