In Corporate March to Clean Energy, Utilities Not Required

A curious thing happened while U.S. utilities were focusing on cheap fracked gas, expensive nuclear power, what to do about coal, and how to fight  renewable energy models that threatened their bottom line.

Some of the nation’s largest corporations decided not to wait for utilities and took their interest in renewable energy into their own hands. They bought their own clean power. And they bought it directly from the companies that produced it. No utility middleman needed.

This clean power revolt, led by some of the biggest corporate energy consumers, is the latest threat to the power purchase and delivery system that’s been in place since Thomas Edison invented it.

Could this be what gets utilities’ attention and forces them to consider clean energy as the future instead of the enemy? Will it ultimately lead to the greening of all of America’s power?

“It’s a really interesting question and I don’t know the answer,” said Blaine Collison, managing director of marketing and strategic partnerships at Altenex, an energy management company that has orchestrated direct energy purchases for Microsoft, Home Depot, Walmart, Procter and Gamble, Yahoo, Bloomberg and 3M, among others.

“What I do know is that we’ve got a very significant number of massive employers and drivers of American economic output that have said, ‘Okay, we want renewables and we’re not satisfied with the current options that are available to us. So we’re going out into the market and getting renewables for ourselves.’”

Many experts say there is more of this to come, and that utilities will not sit back and let this market pass them by.

The trend was spearheaded by the elite of the Fortune 500, especially those companies with electricity-guzzling data centers and manufacturing operations such as Google, Amazon and Walmart.

Most have climate change concerns and want to boost their green portfolio—their customers wanted that, too—and to make the cost of power more predictable.

And so they turned to an old, basic energy project financing model: a power purchase agreement, commonly called a PPA. Traditionally, a utility agrees to buy power for a long time from a generator, giving the builder of an energy plant the stability to attract financing for its construction. The utility then resells power to its customers.

But in PPA 2.0, big customers started asking independent renewable power developers to build the installations, usually off-site and sometimes not even in the same state. The companies  signed contracts to buy the electricity virtually for a decade or longer.

The trend line has been startling in the last few years, with more than 3.2 gigawatts of corporate renewable deals in 2015—most of them PPAs. That’s more than double the amount in 2014.

Municipalities, universities, and other institutions are adopting the model. And the temporary renewal of tax credits for wind and solar at the end of last year makes now an ideal time to jump in.

The windfall has been biggest for the wind power industry. Wind vastly outstrips solar as the corporate PPA power of choice. For 2015 and the first part of this year, about 2,800 megawatts of wind power contracted for corporate PPAs to only a little more than 800 megawatts of solar, according to a Rocky Mountain Institute (RMI) analysis.

“The rise of corporate buyer demand is very exciting for the wind industry,” said Hannah Hunt, senior analyst for American Wind Energy Association. She called it a complement to the increasing wind purchases by utilities themselves, which she said was being propelled by better technology and improved siting that has cut the cost of wind by two-thirds over the last six years.

Hervé Touati, managing director of RMI, called the trend “a very strong signal and an indication of the role corporate buyers can play.”

Companies considering PPAs are generally seeking larger amounts of renewable power than they can get putting a solar system on their roof, at a rate that’s lower than the prevailing cost of electricity, locked in for 15 to 25 years.

Some utilities are getting the message and working with companies to arrange competitive terms.

Google is one of the earliest and largest adopters. In the last six years the company has structured more than a dozen PPAs totaling nearly 1,900 megawatts as it tries to reach its goal of 100 percent renewable power. They include one announced late last year through Duke Energy for solar in North Carolina.

Amazon, also looking to be 100 percent renewable, has contracted for power from several wind farms and a solar installation for nearly 550 megawatts. It structured a solar PPA in Virginia through Dominion.

The ranks of PPA purchasers include Walmart, Equinix, Microsoft and IKEA to round out the top half-dozen.

General Motors is a recent addition. In 2011, GM set a goal of 125 megawatts of renewable energy by 2020. Twenty-two solar, three landfill gas, one waste-to-energy and one hydro installation later, the company is now at 106 megawatts. The largest solar system is just under 12 megawatts.

“Even if we put up solar and covered the entire rooftop of our assembly plant, I’d maybe get 20 or 30 percent of our full load,” said Rob Threlkeld, GM’s global manager of renewable energy. “That’s why we started to look at PPAs.”

Last year GM announced two wind PPAs—one 34-megawatt for several manufacturing facilities in Mexico, another 30-megawatt for an assembly plant in Texas. When the Mexico PPA goes online in a couple of months, it will put GM over its renewable goal four years early. Each plant will save the company $2 million annually for the life of the contract.

Experts expect much more is coming, and soon.

A survey by PricewaterhouseCoopers (PwC) in conjunction with the American Council for Renewable Energy (ACORE), which has also studied the corporate PPA phenomenon, sampled U.S.-headquartered companies with large energy footprints. Seventy-two percent of respondents said they were actively pursuing renewable energy purchases, mainly PPAs.

So far, only 18 Fortune 500 firms have signed renewable PPAs, plus another 10 or so other companies.

Last year’s jump in contracts was partly attributable to uncertainty over the expiring tax credits. That sent many companies scrambling to lock in projects before the Dec. 31 deadline. The credits were extended for five years, driving the 2016 corporate renewable PPA pace below 2015. Experts said companies felt they could take a little more time with their decisions now.

While the renewed tax breaks will clearly help, according to many people, the key driver behind PPA decisions was sustainability, not money.

Many companies now have sustainability and renewable energy goals. And more and more investors, partners, stockholders and customers expect a company to address sustainability and climate change.

“I don’t believe that large corporations are leading this,” said RMI’s Touati. “I believe that customers are leading this.”

Either way, the price increasingly is right.

“You don’t have to use your own capital,” noted George Favaloro, managing director for sustainable business solutions and head of the corporate energy transformation practice at PriceWaterhouse. He was the lead author of its survey.

PPAs also avoid energy market price volatility. They lower energy costs. They don’t require a company to have a large amount of land.

But corporate PPAs do have shortcomings and risks.

“The biggest risk is long-term contracts,” GM’s Threlkeld said. “What’s the market going to look like in 10 to 15 years? What’s our manufacturing presence in that state or country going look like in 10 to 15 years?”

The trend also presents complex questions for the utilities.

In Las Vegas, two major hotels—MGM and Wynn Resorts—have said they will pay hefty fees to leave the local utility, NV Energy, so they can buy renewable power. That was after they were unable to work out renewable deals with the utility.

Such situations could portend even larger economic ramifications said Greg Wetstone, president of ACORE.

“We may have companies saying, ‘Look we don’t want to come to your state if you’re structured in a way that we can’t buy the power we want,’” he said. “That’s a very compelling economic message.”

Utilities appear to be listening.

“Frankly I haven’t heard any worry at all . I’ve heard more enthusiasm than anything,” said Phil Moeller, vice president for energy delivery and chief customer solutions officer at the Edison Electric Institute, the trade association for investor-owned utilities. “The typical issues related to it from a utility’s perspective —perhaps you have to include some balancing capability if it’s just one fuel, and that fuel isn’t available all the time.

“That’s really not a high hurdle.”  

Collison of Altenex said there are broader considerations, beyond any one utility.

“It’s a really interesting intersection of a market opportunity and a set of outcomes that has huge net benefits for the developer, for the power user, for climate change,” he said. “This is about changing the U.S. generation portfolio.

“It’s pretty neat to see the corporates say ‘look we want it and we’re not waiting.’”