Rocky Mountain Institute’s Hervé Touati explains the “winner’s curse” and why the corporate renewables market is about to really boom.
We’re entering a new era in corporate renewable energy purchasing.
The space has grown exponentially and diversified significantly since Google and Apple made their first renewable energy procurements in 2012. Where and how corporations are purchasing renewables is also evolving, according to Hervé Touati, managing director of the Rocky Mountain Institute.
Here are the major takeaways from his talk this week at GTM’s Grid Edge World Forum.
Demand on track to surpass 2016
RMI tracked 1.24 gigawatts of corporate renewable energy procurements from the beginning of January through June 15 of this year. Procurements spiked in 2015, when the industry predicted that Congress would not extend the Production Tax Credit for wind and the Investment Tax Credit for solar. Since then, corporate renewable energy demand has returned to more incremental growth.
Demand remains strong, however, with 2017 on track out outpace 2016. “You can see it’s a growing trend,” said Touati.
So far it’s been a big-company game
The increase in renewable energy deals comes as an increasing number of companies make bold clean energy commitments. Today, more than 95 companies have pledged to go 100 percent renewable as part of the RE100 campaign. Several of those companies, including Google, Microsoft and Lego, and have already hit their targets.
But while sustainability goals have become more widespread, Touati noted that these commitments — and, more strikingly, renewable energy procurements — are still concentrated among the world’s largest companies.
Diversification is a growing trend, though. One trigger is that large companies are starting to demand sustainability measures be met across their supply chain. In 2015, Apple launched a 2-gigawatt clean energy initiative in China, in order to tackle its supply chain emissions. As part of that initiative, iPhone manufacturer Foxconn will construct 400 megawatts of solar by 2018.
Walmart has also launched a major supply chain initiative — dubbed the corporate America’s “moonshot” — that seeks to remove 1 gigaton, or 1 billion tons, of greenhouse gas emissions from its supply chain by 2030. Energy is one of six areas where suppliers can make improvements.
“When the first five to 10 companies turn back and look at their supply chain, that could open up significant new opportunities [for renewables],” said Touati.
New rate structures are also helping to expand and diversify the corporate clean energy market. Momentum created by the “We Are Still In” movement in response to the Trump administration’s withdrawal from the Paris Agreement is helping to get new corporate players engaged as well, Touati said. The group currently includes some 2,086 governors, mayors, businesses, investors, and colleges and universities, three-quarters of which are businesses and investors.
Another emerging trend in corporate renewable energy procurements is the “winner’s curse,” as Touati calls it. This is where the price and the value of a renewable energy project do not match, and the customer’s asset does not deliver the expected return on investment. If not addressed, this issue could put a chill on the corporate renewables space.
The issue is particularly pronounced in the Southwest Power Pool, evidenced in the map below showing wind-weighted electricity prices. In the red areas, wind energy production gets more than $20 megawatt-hour, while in the blue areas production gets just $5 per megawatt hour. “That’s really cheap for electricity,” said Touati.
A lot of wind developers put projects in the blue areas because the land is cheap, the projects are easy to permit, and the wind resource is strong. But that does not necessarily mean it’s a good deal for the customer.
Corporates often contract for renewables at a fixed price and receive credit for the renewable energy that project produces, while the actual electrons that project generates are sold into a wholesale market — a model known a virtual PPA. The expectation is that the wholesale market prices will be higher than the PPA price, or that they will increase over time, and the corporate buyer will save money on the whole. But those savings aren’t always there, as experts have explained.
“As a corporate buyer, you need to start to look at your renewable energy procurement the same way you look at real estate procurement: It’s all about location,” Touati said.
“What you should care about is not the cost of production; it’s the difference between the value of electricity being produced and the cost of production,” he added. “If you produce at $50 and the [market] value is $60, you have a better deal than producing at $25 and the value [being] at $20.”
RMI recently released a market platform that helps commercial customers identify opportune areas to negotiate renewable energy deals, including node-level price data and a future analysis of transmission congestion. The platform is available to members of RMI’s Business Renewables Center.
RMI also formally incorporated the nonprofit WattTime as a subsidiary organization this week, with the aim of helping more corporate customers reduce their carbon footprint cost-effectively. WattTime’s software “can automatically detect the actual emissions impacts when people and companies use energy — both in real time and ahead of time — so any device connected to the internet can use power at times when our electricity is the cleanest,” according to a press release.
WattTime “measures precisely the carbon content of every megawatt-hour produced. If you are more interested in actually having an impact on reducing CO2 emissions, this tool can also tell you where to invest in wind and solar,” said Touati.
Opening the flood gates
Despite the possible risks and challenges, Touati believes corporate renewable energy procurement is on track for more exponential growth.
“I believe the future will be a flood in the making,” he said.
A big part of that has to do with how deals get done. The vast majority of megawatts contracted for to date were signed through virtual power agreements, and those structures can only be signed in organized markets, according to Touati. But new deal options are now emerging as the market for corporate renewables matures. Whether it’s a green tariff, direct access, a green pricing program, a retail sleeve or some other structure, at least one kind of deal is currently available somewhere in the country.
But vertically integrated markets are still difficult to work in. The chart above shows that it’s almost three times harder to get a deal done with a vertically integrated utility territory. “I believe this is going to change for a number of reasons,” said Touati.
First, some customers are getting impatient, such as MGM in Nevada. The casino and hotel company wasn’t satisfied with its utility, NV Energy, and so it struck a deal to pay a fee and opt out of the utility territory. Microsoft is exploring a similar structure, Touati said. “That’s pretty radical; it is certainly changing the market in regulated states,” he said.
Second, in order to have a green tariff with a utility, you take the typical electricity cost, add the cost of wind and solar, and subtract the utility’s avoided cost. In the past, that meant that corporations could do a renewable energy deal, but they had to pay a premium for it. Now, with solar and wind costs getting lower and lower, that differential is going away.
Touati asked: Who would prefer to pay more for dirty power when they could pay less for clean power?
“That’s were the flood is going to come from,” he said.