Renewable Energy Becomes Cost-Competitive for Business
Global Finance, April 2019
Governments around the world may be dawdling in the drive for a greener planet, but private corporations are picking up the pace—at least in switching to renewable energy sources. So-called power purchase agreements (PPAs) for clean electricity more than doubled globally last year, to 13.4 gigawatts (GW), according to a Bloomberg New Energy Finance report. Well-known new-economy consumers like Facebook and Google are joining old-school industrialists like Norsk Hydro and Alcoa in sourcing more solar and wind power. Even oil giant Exxon Mobil contracted for 575 megawatts (MW) of renewables on the windy plains of Texas.
While the push for green energy is concentrated in the US and Northern Europe, new PPAs cropped up in 21 different countries from Brazil to Australia during 2018. Big companies are pushing governments for more renewables-friendly regulation in regions as various as Nevada, where Apple has big plans to exploit the desert sun; and Japan, where 17 industrial concerns have joined the global RE100 initiative to reach 100% renewables consumption by 2050. To get there, they are prodding authorities to open up the country’s as yet untapped offshore wind resources.
The corporate greening surge is encouraging for numerous reasons. Commercial and industrial customers account for two-thirds of the world’s electricity consumption, according to the International Renewable Energy Agency (Irena), based in Abu Dhabi. That means businesses hold real power in efforts to avert a global climate catastrophe. They also have a financial incentive, as wind and solar power become increasingly price-competitive with fossil-fuel generation.
The cost of renewable energy has been dropping by 10% a year for the past decade, says Sam Kimmins, RE100’s London-based director. As of this writing, 166 companies worldwide have taken the 100%-renewables pledge of the initiative, a collaborative effort of businesses. While solar gets most of the press, wind power may be the real economic game changer, as turbines become larger and more efficient and a broader customer base spurs economies of scale. Last year was a tipping point: New capacity from wind became less expensive than coal in many parts of the world. “Companies now actually have capacity to save money when signing one of these deals,” says Kyle Harrison, an analyst with Bloomberg.
Government subsidies to stimulate green-energy construction are increasingly outmoded, he says. The key today is deregulation that allows industrial users to buy directly from wind or solar farms via a PPA, without the intervention of a monopoly utility. In the US, these decisions are generally made at the state level. State governments that get it right include California and Texas, where the allegiance to oil has not stopped a wind-power boom. A prominent foot-dragger is the state of Nevada, where Las Vegas casinos are working with Apple to lobby for independent solar-power purchases—although city buildings, streetlights and parks run on renewable energy.
But commercial power consumers have a long way to go before they rescue the planet. Renewables use by businesses totaled 465 terawatt (TW) hours in 2017, most of it from hydropower that was installed many years ago, Irena tabulates. (Gigawatts of capacity, which Bloomberg measures, translate into terawatts of consumption.) Irena calculates that amount needs to increase by a factor of forty-one, to 19,500 TW, over the next 30 years, if the world is to attain the main target of the Paris Agreement: keeping increases in global temperatures this century to less than 2 degrees Celsius above preindustrial levels.
The quest to bridge this significant gap faces technical, economic and political obstacles. The chief technical challenge is storing renewably generated energy for the intervals when the sun doesn’t shine or the wind stops blowing. US inventor Elon Musk, among others, is working in this technical area. Musk’s automaker Tesla has developed a utility-grade battery that can store enough electricity for 30,000 homes, at a cost of $66 million, Kimmins says. But the technology will have to become bigger and less expensive to spread through the open market. In the meantime, commercial users of renewable energy need backup from conventional energy sources and the accompanying intricate relationships with utilities.
Economically, one of the next frontiers is the distribution of green energy to average corporate consumers, financially unable to back a new wind or solar facility on their own. The best way to accelerate the renewable-energy revolution, everyone seems to agree, is by energy customers making direct purchases from developers that are adding new capacity independent of local utilities. But that takes a big customer, and even then it isn’t easy, says Tor-Ove Horstad, head of commercial energy at Norsk Hydro, the energy-hungry aluminum maker that has entered five wind-power purchase agreements in its native Norway.
The company hammers out multiyear contracts with banks, such as Credit Suisse or Macquairie Group, that need guaranteed sales before they can pool investors together for construction. “It’s quite demanding to enter into these PPAs,” Horstad says. “You need a long-term player with an offtake that’s big enough to make a difference to the bankers.” Mechanisms are slowly developing to aggregate demand from smaller corporate players. Big corporations will be leading the green energy effort for some time to come.
But public policy may be the key choke point for corporate renewable energy. Getting the right regulatory mix is tricky, as the objective shifts from subsidies to the more subtle business of smoothing cooperation between renewables producers and old-line utilities. The path is strewn with political obstacles from all sides: Self-styled progressives are uneasy about deregulation, while mining interests favor a new generation of coal-fired plants that are being built in important economies like India, Indonesia and even Japan. The future price of natural gas, renewables’ main competitor, is a wild card, given the pace of shale exploration in the US and liquefied natural gas buildout worldwide.
The result is an odd stasis around renewable energy in most of the world, despite the level of scientific and public alarm about climate change. “You have exponential growth, but it’s all in a few US states, plus the UK, Ireland, Netherlands and the Nordics,” RE100’s Kimmins says. The optimistic flip side is the enormous potential for other states and nations to follow these leaders’ best practices. Kimmins predicts an imminent “gold rush” in France and Taiwan, for instance.
Despite the hurdles, renewables look set to become the future of electricity generation for corporate consumers.