How utilities are meeting rising corporate demand for renewables
US companies are bypassing utilities to buy renewables, but three new IOU programs hold promise for power company involvement
Last week, as nearly 200 countries met in Paris to finalize an agreement over how to deal with climate change, Google unveiled investments in more than 800 MW of wind and solar, nearly doubling its investment in renewables.
That announcement from the internet giant was just the latest in a larger trend for American companies. Increasingly, corporate giants from Apple to Walmart are buying renewable energy from independent power producers (IPPs) in deregulated markets because utilities aren’t offering what they want. But three investor-owned utilities (IOUs) are pioneering new deal structures that could open the opportunity.
“The most compelling part of the story is that the top 20 solar buyers in 2014 all continue to invest in solar,” said Justin Baca, the Solar Energy Industries Association (SEIA) Director of Research and co-author of SEIA's report, "Solar Means Business 2015; Top U.S. Commercial Solar Users."
“They wouldn’t keep buying solar if the previous investments weren’t working,” Baca said. “Once a company starts going solar, it keeps going solar because it sees it works well.”
Renewables go corporate
Walmart remains the biggest U.S. solar corporate buyer, with 142 MW of installed solar photovoltaic (PV) capacity in 348 arrays, according to the paper. Ikea and Costco are among a handful of companies following suit.
“IKEA and Costco are powering stores with solar. FedEx distribution centers are powered by solar. Apple and Verizon data centers are powered by solar. The headquarters and offices of Mortenson Construction, L’Oreal, the Better Business Bureau and Forever 21 also rely on solar,” it adds.
General Motors, Ford, Toyota, Volkswagen, Owens Corning, Intel, and Johnson & Johnson are also on SEIA’s leader lists. These companies are demonstrating solar is both “environmentally responsible” and “a smart fiscal choice.”
Walgreens, Baca said “changed their reference store design for building new stores to accommodate solar.”
Corporates are also buying wind energy. Amazon Web Services and Hewlett-Packard signed wind project power purchase agreements (PPAs). Microsoft and WalMart projects went online in the third quarter (Q3) of 2015, according to the American Wind Energy Association Q3 market report.
Utilities have to be “part of this equation,” Baca said. “This SEIA report is about distributed generation but it notes that Apple signed a 130 MW off-taker agreement with First Solar to power its California headquarters. It clearly needs the utility and its wires to deliver that electricity.”
In the past six months, corporations have begun procuring large, centralized projects, according to Cory Honeyman, a senior solar analyst at GTM Research and lead author of SEIA's recently released "U.S. Solar Market Insight Report, Q3 2015."
“Over the past half year, just as many corporates have procured large centralized projects as those that have installed rooftop and ground-mount net metered projects,” said GTM Research Sr Solar Analyst Cory Honeyman, lead author of the just-released U.S. Solar Market Insight Report, Q3 2015 from SEIA and GTM Research. “We are at the beginning of a conversation about what corporates want when it comes to a solar product.”
Prologis, a Real Estate Investment Trust (REIT), is new to SEIA’s Top 25 list this year. It entered at number two, with 97.5 MW of installed capacity, because this is the first year SEIA included solar assets on properties where the building occupants did not directly consume the electricity.
Where warehouse and other roofs “have far more space than load,” Baca said, Prologis and some other REITs are building grid-connected solar to sell into wholesale electricity markets through utility PPAs.
SEIA’s leaders include many with large, grid-connected systems. Apple has two 20 MW projects in North Carolina and another in California. Berry Plastics has a 14.2 MW array in NJ and Campbell’s Soups has a 10 MW installation in Ohio. Hartz Mountain, U.S. Foods, Mcgraw Hill, Intel, and Toys R Us are also on the list.
“Clearly, utilities have a role to play,” Baca said. The question of what role seems complex because of the many U.S. regulatory regimes. “But utilities and solar have to work together. The systems have to be interconnected.”
Buyers' Principles for corporate renewable growth
The SEIA report is an example of the demand for solar and other renewables from utilities’ largest customers to meet corporate renewables and sustainability targets, observed Letha Tawney, Utility Innovation Director at the World Resources Institute (WRI).
Along with the World Wildlife Fund and Business for Social Responsibility, WRI has joined up with the Rocky Mountain Institute's Business Renewables Center (BRC) to encourage more corporate investment in clean energy.
Two-thirds of Fortune 100 companies and 43% of Fortune 500 companies have sustainability goals, according to the center. In 2014, the BRC's members built 1.2 GW of renewables, and stand at more than 2 GW of PPAs for 2015. The companies' combined installed capacity is moving steadily toward the BRC's goal of 60 GW of renewables in the U.S. by 2030.
To facilitate such investments, the WRI and WWF brought companies together in 2014 to formulate six Buyers’ Principles that define what the 49 corporate signatories want in a renewable energy contract:
- Greater choice in procurement options,
- Access to cost competitive options,
- Longer- and variable-term fixed prices,
- Additionality, which is access to new projects that reduce emissions beyond business as usual,
- Streamlined third-party financing, and
- Increased purchasing options with utilities.
Companies adhering to the Buyers' Principles now represent “at least 42 million MWh of annual demand for renewables by 2020,” Tawney said. But while a few have offered new corporate renewables programs, the utility sector has yet to fully embrace the principles.
Utility breakthrough deals
Early contracts suggest that NV Energy’s Green Energy Rider and Duke Energy’s Green Source Rider could be successful in attracting large customers to utility renewables programs, but they fall short in some of the Buyers Princples' criteria.
Both programs allow large customers to offset some or all of their utility-delivered electricity with power from renewable generation facilities. But, because they are administered by the utility, the power companies can avoid at least some of the lost revenue from companies taking outside deals.
After threatening to leave NV Energy's grid, data center provider Switch SUPERNAP reached agreements with the utility to obtain the entire 100 MW output of a renewables project. Later, Switch added 79 MW of renewable energy from a second 129 MW project. Apple is the off-taker for the remaining 50 MW balance.
In North Carolina, Google last month became the first company to buy into Duke Energy's Carolinas Green Source Rider program. The tech giant contracted for 61 MW of the Rutherford Farms solar array’s output to serve a data center. An unnamed off-taker took the balance of the project’s 80 MW generation. The 15-year Google contract will support Duke’s PPA with Cypress Creek Renewables, the project developer.
“These are big steps toward deal structures that will allow utilities to take advantage of their key customers’ demand for renewables,” Tawney said. But "they don’t meet all the Buyers’ Principles.”
Both the NV Energy and Duke tariffs are structured with enough flexibility to allow the corporate buyer to approach their utility and ask it to contract for a project, Tawney said.
In this “sleeve project” structure, the utility might develop the project or have a third party handle it through a wholesale rate PPA. The utility then uses its existing infrastructure and transaction management capabilities to “wheel” the project output to the key account customer.
The handling of renewable energy credits is similar in the programs, according to the Buyers' Principles green tariff reference. Contract lengths are negotiable: The NV Energy program offers a term of “not less than two years” and Duke's offers terms of three to 15 years.
The buyer’s negotiated price is dependent on the PPA, Tawney said. To prevent any extra cost in the renewables contract being shifted to other utility customers, the buyer pays the difference between the PPA price and the utility’s avoided cost in addition to the retail rate of electricity.
The additional charge is the "rider" that gives such programs their name, and it puts the utility programs in conflict with one of the Buyers' Principles.
“It is a higher than retail rate per kWh price, which means it does not meet the Buyers’ Principle asking for access to cost competitive renewables generation,” Tawney said.
Renewable energy-generated electricity is price competitive in both the Duke and NV Energy territories, Tawney said. But it is more expensive than the utilities' calculation of their avoided cost.
The two Green Rider tariffs also fail to meet the fixed price principle, Tawney said.
“The price of the premium is locked in, because both the PPA price and the avoided cost are locked in, and the premium is the difference between them,” she explained. “But it is a rider on top of the retail rate, which fluctuates with fuel prices.”
The NV Energy and Duke deals were driven by the off-takers' commitment to find renewables generation and to support these early Green Rider efforts.
But without the opportunity to hedge against natural gas fuel price volatility, the key account buyer may prefer to take its business elsewhere.
“Facebook went to Texas this year and announced a new data center and a wind PPA simultaneously,” Tawney said.
Utility green tariffs 2.0
The NV Energy and Duke Energy Green Riders are “version one,” Tawney said.
“They are getting traction but they don’t work for a lot of our buyers because they don’t meet two of the Principles.”
But Renewable*Connect, a new proposal from Xcel Energy Minnesota, may be “version two.” It would replace the fuel clause portion of the buyer’s bill with a price for renewable energy, and fix it for up to ten years.
The program is working its way through regulatory process. If approved, it could potentially be the first one to incorporate all six Principles.
“It is an example of a utility trying to include all the Principles and create a product that would appeal to the entire range of corporate customers,” Tawney said.
Renewables contracts under the proposed program could be locked in month-to-month, or set for up to a 10-year term.
“Depending on the future price of system fuel, customers may save money over the course of their agreement and can budget using known costs,” according to Xcel.
“The energy charge to corporate buyers is tied to a fixed price, but gas prices will drive the fuel clause,” Tawney said.
The Henry Hub price of natural gas, which has seen historic lows in the $2.00 range in 2015, is expected to rise to $4.37/mmBTU in 2020 and $5.26 in 2025, according to a recent report from the Deloitte Center for Energy Solutions.
With Xcel’s program, buyers can make their own decision about the risk, Tawney said. “If they get it wrong and gas prices stay low, they will pay. But they want the opportunity to also get the benefit if gas prices go up.”
The utility is expediting procurement for two reasons, Tawney said. First, buyers insist there is urgency in providing them with well-structured deals. Second, Xcel wants to take advantage of the availability of the 30% investment tax credit (ITC) for solar.
“Future ‘tranches’ of resources would be sourced from other suppliers and will prompt additional (and incremental) wind and solar investments,” according to the utility’s regulatory filing.
The program only falls short in that it does not presently meet the additionality principle, cutting carbon emissions beyond "business as usual." But, Tawney said, the program does build on renewabes projects already in Xcel's pipeline, and could be expanded in the future.
“They are weighting the urgency over additionality,” Tawney said. “And the projects are just recently online so they are only marginally not additional.”
If programs like those planned by Xcel catch on and start attracting corporate interest, more power companies could move into the space soon.
“I am in conversations with utilities around the country and we expect more proposals during the winter, but Xcel’s is the first to be in the works and they are pursuing regulatory approval. We will see if it draws buyers.”