United States

United States

Green tariffs help open up power market to corporate buyers

When Google announced in April that it is working with Duke Energy, the largest utility in the US, to develop a new kind of renewable-energy tariff, it highlighted the growing interest among large corporate electricity consumers to directly purchase wind as a way to lock in stable pricing and reduce their carbon footprint. But it also unmasked some of the barriers that need to be overcome if this emerging market segment is to drive significant new demand.

Google centres… “You probably won’t see us making any major location decisions without also having a renewable energy plan”
Google centres… “You probably won’t see us making any major location decisions without also having a renewable energy plan”

The internet search giant claims to have been carbon-neutral since 2007 through installing renewables on its sites, directly buying renewable energy and investing in carbon offset schemes. Google sources about one third of the 2,700TWh of electricity it uses each year from renewable sources.

In fact, the availability of green power is increasingly becoming a critical factor in deciding where to expand existing data centres or locate new ones, says Gary Demasi, the company's director of global infrastructure. "You probably won't see us making any major location decisions without also having a renewable-energy plan."

Wind energy brings both the scale and the reasonable cost structure the company is looking for, Demasi says. Although there has been interest among some companies in installing on-site turbines to help power their operations, it is not necessarily the best option for large loads. "On-site systems typically do not produce sufficient electricity to power large facilities," Google said in a recent white paper on the subject.

Demasi points to Google campuses in Oklahoma and Iowa, each covering about 405 hectares and representing about $1 billion of investment. "Part of the consideration to go so big in those markets was the promise of renewable-energy supply in the long term. Obviously, we have world-class wind in both those states."

What Google did not have, however, was an easy way to tap into that resource. It could have looked into buying renewable energy credits (RECs), but the company wants its purchases to drive new project development rather than just reshuffle what is already on the grid.

"Google has a pretty high standard in terms of what projects we consider to be additional. For us, it's a project we can point to and say we actually made that happen," Demasi explains.

The company ended up signing 20-year, fixed-priced power purchase agreements (PPAs) with wind-energy developers in both states for the output of two projects totalling 215MW of capacity, says Demasi, but that is not its preferred route. Because of the way the markets are structured, Google has to go through a complex process of buying the power, stripping off the RECs, then reselling the electricity back into the system.

A more direct route

"We wish we could just go to the utilities and have them provide that service to us. But frankly, we got tired of waiting for that to come together and we went out and did these deals ourselves."

The problem is that, with few exceptions, US utilities and the state commissions that regulate them do not provide a way for large users to request renewable power. The agreement with Duke promises to change that, says Demasi.

Google is investing $600 million to expand its data centre in Lenoir, North Carolina and, in response, Duke, which operates in the state, will develop a new renewable-energy tariff it will use to sell clean energy directly to industrial customers that choose to opt into the service. The utility expects to file the plan with regulators this summer.

What Duke's new tariff will do is open up the market and drive new investment in the renewable-energy sector, Demasi says. "Google does care about pushing the industry forward," he adds.

New framework

The work Google and Duke are doing will help set a framework for other utilities to follow, says Rajesh Swaminathan, executive director of new generation at Michigan-based utility CMS Energy. He sees nascent interest from larger customers in buying renewable energy for their facilities, but admits satisfying that need means stepping into uncharted territory. "It's not that utilities don't have an interest in going there," he says. "It takes a long time to develop the necessary structures, and it takes an investment to get there."

Designing a workable tariff, for example, is a major issue. It has to pass on the true cost of procuring and managing wind power for an industrial customer in a predictable way and, at the same time, shield other ratepayers. "We want to make sure other customers aren't left holding the bag," says Swaminathan.

Despite the challenges, corporate customers are moving forward with wind energy purchases. The American Wind Energy Association's (AWEA) 2012 annual report shows at least 18 industrial customers, 11 school districts, and eight towns or cities that bought directly from wind developers last year.

Walmart, the world's largest retailer, is in the market for 7,000TWh a year of green energy globally by 2020 as a step towards its ultimate target of being 100% powered by renewables. About 2,500TWh will be sourced in the US, says Greg Pool, Walmart's senior manager of renewable energy and emissions. The company plans to accelerate its rooftop solar programme, but sees this as only a partial solution, he says.

"It doesn't really move us to where we need to be," Pool explains. To fill the gap, the company will be pursuing wholesale market purchases and large PPAs with developers. "I think it is going to take some co-operation on both sides, but Walmart is open for business to do wind deals," he says.

Moderate growth

Just how big an opportunity corporate buyers represent remains to be seen. Non-utility wind power purchases in the US totalled only 174MW last year, and although that number will increase, few expect it to become a dominant source of demand. "We see it growing very moderately over the next 10-15 years," says Justin Wu, global head of wind for Bloomberg New Energy Finance.

Still, at a time when US utilities in many parts of the country have already met state-mandated renewable energy targets - and the wind sector is facing stiff price competition from cheap and abundant natural gas - industry players see it as a market segment worth pursuing.

"I think the corporate activism and demand for renewables is one of the most positive things we see in the market right now," says Michael Rucker, chief executive of developer Juwi Wind North America.

A recent study from wildlife conservation organisation WWF found that 60% of companies that make up the Fortune 100 and Global 100 have set greenhouse-gas reduction goals. Two dozen of those have set specific targets for renewable energy use. In addition, the study found, many are moving away from buying short-term RECs to long-term investment strategies such as PPAs and on-site generation as a way to hedge against rising utility costs.

That interest from the private sector provides the wind industry with an a opportunity to break out of the paradigm that the utility is the only customer, says Jerry Bloom, a partner at law firm Winston & Strawn.

"Part of the problem we have is that the utilities don't really want good value. They're buying electrons and they want cheap electrons. They're not necessarily interested in the green product," Bloom says. "Don't we need to break this model apart and start looking at it little differently if we are really going to create a sustainable long-term market?"

Walmart's Pool agrees that wind developers should have a broader view of who its potential customers are. "The industry needs to be innovative and creative in partnering with people like us to diversify its customer base. You need to add more customers to the list than just utilities," he told delegates at AWEA's recent annual conference.

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