The New Boom

Author: Justin Gerdes

This story originally appeared in the Spring 2018 issue of the Mendoza Business Magazine.

Tech giants and multinationals are investing heavily in renewable energy. Here’s why.

The New Boom

I still have a “Hopenhagen” T-shirt hanging in my closet.

I picked up the souvenir during the weeks I was in Copenhagen in December 2009, reporting on the United Nations Climate Change Conference, better known by its U.N. moniker, COP15. There were high hopes surrounding the event, where ministers and heads of state spent 11 days in frenetic negotiations about commitments to reduce greenhouse gas emissions and deploy renewable energy technologies.

Despite those hopes, the talks broke down into disarray. A handful of world leaders, including then-President Barack Obama, scrambled to salvage a way forward in the conference’s closing hours. Instead of producing a binding global agreement to reduce carbon dioxide emissions, the negotiations resulted in a political declaration recognizing climate change as an urgent global challenge and stating that actions should be taken “to hold the increase in global temperature below 2 degrees Celsius.” 

The memory of this well-publicized failure, along with recent political moves to promote coal and impose tariffs on imported solar cells in the United States, might lead you to believe the future of renewable energy is dim. But the reality is quite the opposite, due partly to a massive but somewhat invisible trend: Large corporations, including tech giants and other multinationals, are making big investments in renewable energy technologies.

And this corporate renewable energy investment boom, which has largely been a U.S. phenomenon, is about to go global. A virtuous cycle has been set in motion: Affordable clean energy made ambitious corporate renewable energy targets possible; ambitious corporate renewable energy targets are helping to make clean energy even cheaper.

Today, renewable energy from the wind and the sun is increasingly the default source of new power added to the grid. In 2016, renewables accounted for nearly two-thirds of new power capacity installed globally, according to the International Energy Agency. A report published in January by the International Renewable Energy Agency found that the cost of generating power from onshore wind turbines and solar photovoltaic panels fell by 25 percent and 73 percent, respectively, since 2010, and predicted that all renewable energy technologies would be economically competitive by 2020.

The steep decline in the cost of clean energy has triggered a dizzying succession of record-setting deals. According to GTM Research, the record-low global power purchase agreement (PPA) price for utility-scale solar power has been broken seven times in countries on three continents since the beginning of 2016.

In short, clean energy has become cheap energy. Once the favorable trajectory of renewable energy economics became apparent, it didn’t take long for some of the world’s largest companies to act. Google and Apple signed trailblazing renewable energy deals in 2012. Since then, the corporate clean energy market has grown to levels likely to surprise those who don’t follow the industry. In the United States and Mexico alone, companies signed deals for just over 10 gigawatts of renewable energy capacity between 2012 and 2017.

THE ROAD FROM COPENHAGEN

Soon after the Copenhagen conference, the United States, China and other nations joined early leaders including Germany and Denmark in investing in solar and wind power plants with the goal of driving down the cost of clean energy and reducing planet-warming pollution. The stimulus passed in the United States amid the Great Recession alone included a $90 billion investment in clean energy. By the end of 2015, China’s annual spending on clean energy hit $100 billion.

By the time nearly 200 nations met in Paris to close a global climate deal in December 2015, the energy market had shifted. The cost curve for wind, solar and other renewable energy technologies had plunged. This time, political leaders were confident clean energy was ready to take over, and more than 160 parties submitted, in the arcane U.N. lingo, Intended Nationally Determined Contributions. Think of them as national climate action plans — and a signal to investors that clean energy was the future.

Encouraged by the improving economics and nudged by customer expectations, a growing number of major companies are making public clean energy commitments. Seventy-one Fortune 100 companies have a public renewable energy target. As of January 2018, 122 multinational companies had joined RE100, an initiative led by The Climate Group and CDP (formerly the Carbon Disclosure Project) comprising companies that have pledged to source 100 percent of their electricity needs from renewable energy.

More than two dozen members have already achieved 100 percent renewable electricity purchasing, primarily through buying renewable energy certificates (RECs). These certificates are a tradable commodity issued when 1 megawatt-hour of electricity is delivered to the grid from a renewable energy power plant.

Nearly 90 percent of respondents to a recent RE100 survey cited compelling economics as a major driver to buy clean energy, with 30 out of 74 stating that “renewable electricity was either cost competitive or delivered significant savings on energy bills.”

Purchasing RECs isn’t the same thing as powering operations directly with renewable energy; it means the company bought renewable power in quantities that match its consumption. Here, it’s important to note that big tech companies are also huge consumers of energy; specifically, electricity to power all of the data centers and computing resources.

Consider Google, for example, which achieved the 100 percent renewable milestone in November 2017 when it announced the purchase of nearly 3 gigawatts of renewable energy capacity. The amount was equal to what all of its offices and data centers around the world use on an annual basis, according to a December 2016 Google report.

Google’s electricity consumption in 2015 reached 5.7 terawatt-hours, which was nearly equal to San Francisco’s usage in the same year. “Ensuring that we have a cost-competitive, predictably priced electricity supply is an important part of running our business in a responsible way,” Google said in its report.

The next step in committing to renewable energy is to move beyond purchasing these certificates to actually powering operations with the energy generated by wind or solar technology. Kyle Harrison, corporate energy strategy analyst with Bloomberg New Energy Finance (BNEF), in an interview, said, “We’re expecting [these companies] to transition from purchasing credits to signing long-term agreements for power.”

That shift is well under way. Google, Amazon, Facebook, Walmart, T-Mobile, Nike, Anheuser-Busch InBev and AT&T are among the growing number of companies now directly sourcing renewables by signing PPAs for electricity from large wind and solar farms. According to market intelligence firm SNL Energy, corporate PPAs accounted for 100 percent of the wind power PPAs signed in the fourth quarter of 2017.

Companies that have not hit their clean energy targets will be a big source of demand in 2018 and beyond. “We’re expecting more companies to pledge to be 100 percent renewable in the coming years,” said Harrison.

He went on, “In the U.S., if you ask a lot of corporations that have signed these deals already, they’ll say they will continue to sign deals because they want to hit their targets first and foremost — so, there, sustainability is the driver. But, there are a lot of companies that are happy with their deals from an economic standpoint as well.”

SMALLER BUSINESSES WANT CLEAN ENERGY, TOO

Research published by Bloomberg New Energy Finance in January offered a comprehensive look at the scale of this booming market. In its inaugural Corporate Energy Market Outlook report, BNEF tracked a total of 5.4 gigawatts of clean energy contracts signed by 43 companies in 10 countries in 2017, an impressive 25 percent increase over 2016.

But most of those deals have been signed by large multinational companies with dedicated clean energy procurement teams. What if you are the CEO of a small- or medium-sized company that wants to move to 100 percent renewable energy, but lacks the resources or in-house expertise to pursue and close complex energy deals?

Energy expert Gianna Bern said that small companies may still be waiting and watching the market evolve. Bern is an associate teaching professor of finance at the Mendoza College of Business and the author of Investing in Energy: A Primer on the Economics of the Energy Industry. “For smaller companies, there could still be issues related to cost,” she said. “As costs continue to come down, I think it will be more attractive for them. You also have to keep in perspective: Where are you? What kind of clean energy do you have access to?”

Before coming to the University of Notre Dame, Bern worked on energy project finance in markets all over the world. Based on her experience, she said, “What works in one location may not necessarily work in another. You’ll begin to see smaller companies move to what becomes economically available and what solutions are available to them. I think it’s going to improve.”

Aggregation, or banding together on energy purchases, is an emerging solution for smaller companies. Take the Seattle-based startup LevelTen Energy. In January, the company launched an online PPA marketplace that matches buyers and sellers of renewable energy. The platform aggregates small companies’ requests for clean energy into bids for power from large wind and solar projects offering lower risk and better pricing.

“Smaller companies haven’t had the opportunity to take advantage of the economies of scale of a large off-site solar or wind project, so those PPAs are typically higher,” said Harrison. “This aggregation model, which allows a bunch of smaller companies to buy a portion of a bigger project, should allow a lot of smaller companies to take advantage of those cheaper prices.”

He added, “Having that expertise from a middleman is also going to make it a lot easier for these companies that don’t have in-house power teams. You really only see that in some of the largest companies like the Amazons and the Googles. Other companies are going to need this kind of hand-holding or guidance to break into the space.”

POTENTIAL HEADWINDS

The last five years have been marked by phenomenal growth in corporate clean energy procurement, but the rate of future growth in the United States could slow if companies aren’t prepared for a mix of recent and long-term challenges.

The Republican tax bill signed by President Donald Trump in December 2017 included a substantial reduction in the corporate tax rate, from 35 percent to 21 percent. That shift could imperil one of the primary tools renewable energy project developers have relied upon to finance projects: tax equity. The tax equity market accounts for about half of the finance for wind and solar projects.

Congress has used federal tax credits to incentivize investors and developers to build renewable energy projects. The credits take the form of either an investment tax credit (ITC) assessed against the total project cost or a production tax credit (PTC) paid for each kilowatt-hour of electricity fed to the grid.

The wrinkle: To claim the credits, the company must have taxable income. “If you’re building a renewable project and you don’t yourself have taxable income, then you have to figure out a way to monetize that production or investment tax credit,” Pat Eilers (ND ’90, ’89), managing director at investment management firm BlackRock, said in an interview.

Developers have looked to third parties with billions in annual tax liability — typically large banks such as JPMorgan Chase or Citigroup — to partner on projects. “The banks can purchase the tax credits from a renewable developer and offset their taxable income expense on an annual basis,” said Eilers. With the corporate tax rate slashed by 40 percent, big banks may not be such active players in the tax equity market going forward.

“The drop in the corporate tax rates from 35 percent down to 21 percent will lower the taxable income base of a lot of the tax equity providers, which will shrink these tax equity providers’ ability to monetize the production and investment tax credits,” said Eilers.

The Trump administration’s new tariffs on imported solar cells and modules are another factor that could blunt solar deployment over the next several years. The tariffs start at 30 percent and step down by 5 percent annually to 15 percent by year four. The tariffs are intended to support U.S. solar manufacturers against foreign competitors, particularly those from China, where the government had, according to the U.S. trade representative, “us[ed] state incentives, subsidies, and tariffs to dominate the global supply chain.” But, by increasing the cost of a key component in solar projects, the tariffs could reduce U.S. solar installations by 11 percent through 2022, according to GTM Research.

A long-term consideration for executives looking to buy clean energy is a lack of transmission lines connecting large wind and solar projects to population centers and manufacturing facilities. In a recent interview with Bloomberg Environment, Rob Threlkeld, GM’s global manager of renewable energy, called on regional transmission organizations and federal agencies in the United States to account for future corporate clean energy demand in their transmission development plans.

“Electricity that is both cost-effective and clean is one of the determining factors that goes into any new investment or expansion,” said Threlkeld. GM, an RE100 member, has pledged to operate on 100 percent renewable electricity by 2050. “For us to continue to find projects that fit our needs ... we need to be able to interconnect those assets to a grid.”

THE CORPORATE CLEAN ENERGY INVESTMENT BOOM GOES GLOBAL

Even if these challenges crimp U.S. corporate clean energy investment, expect any slowdown to be brief. The business case for renewables is too strong. “In many markets in the United States,” said BlackRock’s Eilers, “solar and wind are now cost competitive, even without the PTC or ITC. The grid is transitioning to wind and solar intermittent (due to the variability of wind and sun) resources coupled with natural gas firm (available on demand) resources. Wind and solar are zero-marginal cost and natural gas is more economic in today’s $3-per-gallon gas price environment than coal and nuclear generation facilities.”

And the market is ready to ramp up outside the United States, too, in part because U.S.-based multinationals are now looking to buy clean energy overseas.

As part of the Dutch Wind Consortium, Google and its partners, AkzoNobel, DSM and Philips, jointly negotiated PPAs with two wind farms in the Netherlands in 2016. In December 2017, a group of multinational companies, including Google, Amazon, Microsoft, Unilever and Ikea, issued a joint declaration urging European Union member states to support a renewable energy target of at least 35 percent by 2030 and to back corporate renewable PPAs.

“Large companies — the Amazons and Googles of the world — that do have very large facilities, for them it does make good business sense to procure their own energy,” observed Mendoza’s Gianna Bern. “For large companies that are running large plants in many parts of the world, the time has come for them where they can be large energy purchasers in the utility market.”