The central lesson for utilities in the talk of a death spiral is if they don’t give their customers what they want, they go elsewhere.
To date, that talk is mostly about rooftop solar taking their revenues, but some utilities have begun to notice some of their biggest key accounts looking for greener pastures. Well, greener energy.
“This is a new environment. You don’t just build it and shove it in the rate base. There is a more open dialogue. Renewable energy is at the center of that,” explained Altenex Managing Director Duncan McIntyre.
Altenex is a broker-procurer of renewables for corporate buyers who want to go green. Discreetly, the company doesn’t talk about who is buying. But the solar and wind industries do.
The numbers tell the story
Utility power purchase agreements (PPAs) accounted for 40% of the wind capacity commissioned in 2014, down from 75% in 2013 and 76% in 2012, according to the "U.S. Wind Industry Annual Market Report" from the American Wind Energy Association (AWEA).
The number of non-utility entities contracting for wind reached 60 last year. Microsoft, Walmart, Yahoo, Amazon Web Services, the U.S. General Services Administration, and Cornell University joined the ranks of institutional buyers of wind in 2014. Already on the list were Google, Apple, Oklahoma State University, Ohio State University, and the U.S. Air Force.
PPAs for over 1,770 MW of wind were signed in 2014 by private sector, government, and education institutions. Some, like Facebook and Google signed with utilities. Others, like IKEA and Anheuser-Busch, bought their own wind.
Corporate buyers also upped their commitments to solar in 2014 by 28% over the year before, taking the cumulative installed capacity of top U.S. companies to over 569 MW at 1,110 facilitites, according to “Solar Means Business,” a report from the Solar Energy Industries Association (SEIA). That was over twice the 279 MW cumulative installed capacity recorded at the end of 2012.
“The declining cost of renewable technologies, new third-party business models with attractive returns on investment, and price-risk mitigation are expanding the choices available,” according to another report — “Renewable Energy Options for Electric Utility Key Account Customers” — from the Solar Electric Power Association (SEPA).
These things and enabling policy are making solar “an economic, not just environmental choice…[and] loosening the existing exclusivity with a particular utility,” it reports.
Walmart led private companies with a cumulative 105.1 MW of installed solar capacity in 2014 and added 15 MW during the year. Kohl’s, Costco, Apple, and IKEA rounded out 2014’s top five.
More of the same this year
Amazon Web Services (AWS) contracted for the 208 MW output of an Iberdrola Renewables wind project to power North Carolina operations this year. And Hewlett Packard took the output of a 112 MW SunEdison wind project for a Texas data center.
One of the major early year highlights for solar, according a joint report from GTM Research and SEIA, was corporate entities’ “aggressive procurement of centralized solar.”
More recently, SolarCity announced it would go after small and medium-size businesses, which CEO Lyndon Rive has called a "neglected" part of the solar market. GTM Research Analyst Shayle Kann called SolarCity’s new offering "meaningful because no one is doing small commercial well."
Among Altenex’s Fortune 500 clients, exploring the renewables opportunity has increased “somewhere between three-fold and five-fold over the last two years,” McIntyre said. “Actual transactions have gone up about two fold to three fold over the last year alone.”
There are three key drivers that close deals between independent power producers and corporate buyers, McIntyre explained: Cost savings from increasingly competitive renewables, management of electricity price volatility risk due to rising natural gas penetration, and corporate sustainability goals.
“That combination drives the decision to enter into these contracts,” McIntyre said. “And it is rare the organization’s finance group will support a sustainability initiative at scale if it doesn’t meet economic thresholds.”
The opportunity for utilities
Utilities’ key account customers are finding “economically compelling alternatives to their traditional regulated utility’s offerings,” the SEPA paper explains. “Within this shifting landscape, utilities are beginning to proactively respond to these new interests through a variety of new renewable energy products, programs, or projects ... targeted to their key account customers.”
“Utilities are in a position to serve them,” explained SEPA Sr. Research Analyst and paper co-author Ryan Edge. “They have existing customer relationships. They have energy sector expertise. They have the grid. Until recently, they haven’t been proactive in developing new products to meet the demand.”
The paper outlines five customer expectations utility offerings must meet:
- Economic value comparable to either retail rates or on-site generation
- Favorable and flexible contract/financial terms such as competitive dollar value, contract term, and deal options
- Additionality, such as the assurance the renewable generation will not be used by the utility to meet a mandate or in any other way
- Risk comparable to that of on-site generation
- Streamlined transaction processes and costs
Because utility offerings “will be benchmarked against the values provided by on-site generation, either customer or third-party owned,” the paper explains, the reasons key accounts don’t “simply utilize on-site generation and skip the utility option altogether” vary by market.
Policies, electricity rates, and resources differ. “Key accounts may assess the costs and risks and decide the utility program, while not exactly like on-site generation in its benefits, offers a compelling alternative.”
Green tariff programs, in which utilities supply renewables at a premium, were among the earliest offerings. But the “sleeve project seems to be the winning utility model,” Edge said.
In a sleeve project, a third party handles development and operations with a wholesale rate PPA from the utility. The utility uses its existing infrastructure and transaction management capabilities to “wheel” the project output to the key account customer (called the contract sleeve) at its retail rate.
“The utility keeps its relationship and load with that customer and maintains the revenue,” Edge explained. “The customer gets renewable energy. And the third party gets to develop a contracted project. All three benefit economically.”
Through its sleeve contract with Arizona Public Service, Edge said, IO Data Services was able to meet its corporate sustainability goals. “But it also created another product for its customers. It has data center services at one price and a 100% renewable power data center option at a slightly higher price.”
With a sleeve contract, Edge said, “the utility meets its key customers’ demands and retain its revenue.”
Many regulated utilities are moving in the same way, McIntyre said. The two main drivers are policies, like renewables mandates, and taking advantage of increasingly competitive prices for generation in resource rich regions, like wind in the Midwest and solar in the Southwest.
If the utility doesn’t provide renewables to its customers where those factors are driving forces, they may very well get them for themselves, he added. “But the preference from the corporate is always to buy their power from the utility because that is the entity they have had a relationship with and the entity that has always delivered reliable electricity.”
Nebraska Public Power District (NPPD) established a tariff that passes through the cost of wind energy to the corporate entity, McIntyre noted. "NPPD owns the assets and the corporate buys the renewables product it wants."
If such offerings are not available, Altenex clients have gone elsewhere for renewables, he added. “Some states view this type of tariff as a way to attract businesses.”
The move of utilities to renewables offerings to meet the demands of corporate customers “is definitely a trend,” McIntyre said. “I don’t have statistics but what is happening at the distributed generation level is also happening at the utility-scale generation level and we are not at the peak of the curve. We are still on the upward slope.”
Pressure, he added, is coming from customer demand. It is also coming from state regulators who are concerned about the rising cost of electricity. It is coming from the volatility of natural gas prices. And it is coming from federal emissions regulations.
“Five years ago, if I walked into the average regulated utility and suggested a program where we build a wind farm and they deliver the power to the corporate buyer, I would have been laughed out of the room,” McIntrye said, “The dialogue is a lot easier to have now.”