By Elias B. Hinckley
An increasing number of corporations are directly buying (or building) their own clean electricity. For decades most Fortune 1000 companies did little more than try to manage costs as they bought electricity and fuel from the existing marketplace. This model of simply relying on the existing marketplace to meet energy needs has, however, suddenly become outdated. More and more companies are realizing the strategic advantages of sourcing renewable power. Companies that fail to adapt will face serious competitive disadvantages as this trend accelerates.
There are several reasons for this explosion in interest in direct purchases of clean energy. Reasons range from pure cost per kwh purchased, to market and regulatory certainty, to the brand value of reducing reliance on fossil fuels, to concerns over the future of specific markets in the face of a changing climate. Consistent in every one of theses reasons is an underlying economic case – replacing electricity generated from burning fossil fuels with electricity from wind and solar is a good business strategy.
Over the past few years electricity from wind and solar has become cheap – in many cases it is less expensive to build new generating capacity from wind or solar than to build a new gas or coal plant. Buying renewable electricity removes fuel price volatility so prices are much more stable. Wal-Mart has been aggressively buying renewable power for years, primarily for the cost saving the company realizes. Ikea constantly touts immediate costs savings as the primary driver for its massive clean energy purchasing. Oil refining giant Valero uses wind power to drive refining operations in Texas because wind power was cheaper and the price was more stable than what was otherwise available in the market.
Renewable electricity is clean, and an increasing number of companies are setting aggressive clean energy and greenhouse gas emission reduction targets. Companies across the business spectrum – from Apple to General Motors, which both publicly announced goals for 100% renewable power for their global operations are using clean energy investments to gain competitive brand advantage, companies ranging from Bank of America to Dow have built advertising plans around their clean and sustainable investments. Consumers, both individuals and businesses, place real value in their buying choices based on the energy and climate footprint of brands. Forward thinking companies are committing to buying clean power in an effort to build a competitive advantage with these consumers.
Corporate interest in renewables is also being driven by anticipation of significant climate-policy changes, which could materially disrupt the market and existing cost structure of fossil fuel-based electricity. Several countries have put serious carbon pricing regimes in place as part of their efforts to meet the goals laid out in the Paris Climate Accord, and the two largest global markets, China and the U.S. have both formally joined the pact. In the U.S., EPA’s Clean Power Plan is still being contested, and the effect of specific implementation remain uncertain, but a material impact on power markets and electricity customers remains virtually certain. Around the globe many other countries are working through the implementation of new laws to reduce greenhouse gas emissions, all of which shifts value towards renewable electricity generating sources.
Many large corporations are not only trying to calculate the effects of these regulatory shifts, but are directly supporting these climate change driven policy changes. Amazon, Apple, Google, Microsoft, Mars, Ikea, Blue Cross and Blue Shield, and Adobe all submitted briefs supporting the Clean Power Plan in its appeal before the DC Circuit Court of Appeals. While there was a diverse set of reasons for each of these companies’ support for the Clean Power Plan, from getting regulatory certainty on the future of power markets, to mitigating the negative health effects (and costs) to a belief it will support longer term global economic stability, each was rooted firmly in the conviction that the Clean Power Plan would lead to long-term valuation creation for these companies. As more corporations see the value of aligning their business with mitigating and managing climate change, the pace of clean energy acquisition by corporations will only increase, growing a market worth hundreds of billions of dollars for new solar and wind projects.
|Forward thinking companies are committing to buying clean power to build a competitive advantage with consumers. Corporate interest in renewables is also being driven by significant climate-policy changes, which could disrupt the market and existing cost structure of fossil fuel-based electricity.|
The potential for this new market, worth hundreds of billions of dollars, has grabbed the attention of clean energy developers and investors. While the renewable energy market has grown rapidly over the past few years, developers and investors have become frustrated by many utilities are reducing the amount of wind and solar generated electricity that they are willing to buy under long-term contracts. These long-term commitments to buy the electricity generated from a wind or solar facility are typically necessary for an investor or lender to put money into the construction or purchase of a new wind or solar farm. Without these long-term agreements billions of available dollars are not being committed to projects.
New corporate buyers will be a vital and growing segment of the solar and wind markets. Developers and investors are actively looking for ways to gain access and market share in this new segment. The Renewable Energy Buyers Alliance (REBA), which was created by the Rocky Mountain Institute, the World Resources Institute, the World Wildlife Federation and BSR, has attracted more than one hundred of the largest corporate buyers to join its membership, as well as dozens of leading renewable energy developers, private equity fund managers, and banks to REBA events.
The combination of these two dynamics – developers and investors looking for new long-term commitments to buy power, while businesses are looking to lock in long-term supplies of clean and inexpensive solar and wind power – is driving a fundamental shift in the electricity market. In 2012 500 MWs of renewables were directly contracted for using corporate power purchase agreement, by 2015 more that 3400 MWs of capacity was contracted for by corporate buyers and the Rocky Mountain Institute projects this market to be more than 60,000 MWs by 2025.
In addition to shifting corporate strategy and a matching demand for long-term buyers, changes in the electric regulatory structure and innovations in the deal structures used to sell and finance electricity have helped open this new market for buyers to contract directly with power plants many miles away. Additionally, an explosion in available data about usage as well as new tools to manage energy consumption are making the intermittent nature of solar and wind power easier and cheaper to manage, further supporting the economic case for shifting corporate energy consumption to renewable power.
Developers and investors must reconcile this huge new segment of the market for power as part of their respective strategies. Effective, forward-thinking energy planning will be an important part of future competitive advantage across most businesses – and the companies that get this transition right will be rewarded. It will be vital for corporations to learn the power contracting and delivery process at a level of detail that only a select few strategic-thinking super-users of energy have ever considered. Finding the experience and talent to succeed in this dynamic new market will be increasingly challenging. Early adopters are building a critical advantage by being ahead of this market, and building a solid foundation for either the buying or selling of renewable power directly to corporations will be a barometer of success for businesses of all types.
Elias B. Hinckley is a strategic advisor on energy finance and energy policy to investors, energy companies and governments. He is an energy and tax partner with the law firm Sullivan and Worcester.