Fortune 500 companies power up renewables — are utilities in the mix?

A growing number of Fortune 500 companies are putting their dollars into energy efficiency and renewables to reduce their carbon footprints — and getting a better return on their money than from their traditional investments.

The trend among the Unites States’ biggest and most successful companies is increasingly green, according to Power Forward 2.0, a recent report jointly produced by environmental and business groups. The study found that 43 percent of Fortune 500 companies and 60 percent of the Fortune 100 have set voluntary goals to cut their greenhouse gas emissions.

In many cases, they are looking to renewable energy to meet their carbon reduction targets, often opting for direct ownership or third-party power purchase agreements (PPAs) for wind, solar and other clean energy and leaving utilities out of the picture.

“For the largest corporations in the United States, clean energy is now becoming mainstream,” the report says. “The aggregate impact of the company actions is significant. Among the 53 Fortune 100 companies reporting on climate and energy targets . . . they are conservatively saving $1.1 billion annually through their emission reduction and renewable energy initiatives.”

The associated emissions reductions, about 58.3 million metric tons of carbon dioxide in 2012, is the equivalent of retiring 15 coal plants, earning the companies an average return on their investments of $19 per metric ton, the report said.

A previous study by the World Wildlife Federation found that four out of five companies with greenhouse gas and energy efficiency goals reported a better return on these programs than on their traditional investments.

The World Wildlife Fund, Ceres, Calvert Investments, and David Gardiner and Associates partnered on the 2.0 report, which expands on a 2012 study, also called Power Forward, that surveyed companies in the Fortune 100 and Global 100. The Globals are not included in the new report.

The message for utilities is clear: Companies already seeing tangible financial benefits from carbon-cutting programs will place a high value on access to renewable energy offerings and services when deciding where and with whom to do business.

These findings echo research recently released by the Solar Electric Power Association (SEPA) on the challenges and opportunities for utilities in developing solar offerings for large corporate customers, known in the industry as key accounts.

Traditional energy providers must now compete with the compelling economics of customer-owned generation and third-party PPAs. Apple, for one, prefers direct ownership of its energy resources. In North Carolina, it is planning a 17.5-megawatt (MW) solar farm near Claremont, on the heels of a 20-MW solar farm adjacent to a nearby data center in the community of Maiden. IKEA has 40 rooftop solar installations in operation with a 41st, a 869-kW system, under construction on a store in Kansas.

Power Forward 2.0 spotlights Walmart, Costco and Kohl’s as the leading retailers in onsite solar generation with a combined 216 MW. Meanwhile, Google and many other companies are signing PPAs with solar and wind developers or utilities for long-term supplies of renewable energy at or below retail electricity rates.

In the handful of states where PPAs are prohibited, virtual, or synthetic, PPAs are gaining popularity. A renewables developer enters into a contract with a corporation for the output of a specific project, set at a fixed rate. But the developer then sells the project’s energy output into the wholesale market rather than directly to the corporation that signed the PPA.

If the wholesale price exceeds the PPA rate, the developer pays the difference to the corporation; if it’s below the PPA rate, the corporation pays the difference to the developer. This arrangement not only hedges price volatility but also provides the corporation with a supply of renewable energy credits.

Walmart, Google and a few other very large corporations have gone even further in their search for cost-effective ways to meet their climate goals by legally becoming players in wholesale electricity markets. They can bid and buy electricity at the same lower rates utilities receive before the addition of retail capacity charges, delivery charges, infrastructure cost allocation and profit.

Thought leaders in the power sector are starting to recognize the impact and broad implications of corporations’ clean power and energy efficiency programs.

Speaking at a recent round-table dinner in Washington, D.C., David Crane, CEO of NRG Energy, pointedly asked who was going to lead the transition toward cleaner power that is clearly underway across the country.

“For the first time in American history, could we have a social movement that’s actually triggered by corporations?” he said, as quoted in an article on Bloomberg.com. “The resources that corporate America has at its disposal are amazing. We need a bottom-up revolution.”

Challenges for the business community are opportunities for utilities

Power Forward 2.0 highlights three areas where corporations face challenges in procuring renewable energy that, the report said, can become opportunities for utilities.

Lack of in-house expertise: Fortune 500 companies are not inherently specialists in energy procurement because they are primarily engaged in operations such as financial services, manufacturing, retailing, healthcare or information technology, to name a few. Gaining in-house expertise on renewable energy may require hiring and training new personnel or contracting out for this skill set.

The PPA market: A typical PPA covers a 15-20 year period, or even longer, terms that do not fit well into the business horizons of large corporations. Another pitfall, PPAs are usually nontransferable. Transferable or not, the contracts are not standardized agreements. Each one is written individually necessitating legal oversight and additional costs.

State laws: State energy policies across the U.S. are a patchwork that can also raise barriers for corporate efforts to buy renewable energy. Some states still restrict or ban third-party activities such as PPAs, solar leasing and financing; others still do not allow net metering. In these more restrictive markets, utilities can use their competitive advantage as regulated monopolies to move forward on innovative clean energy programs tailored to corporate customers.

Innovation will be critical

Every time large corporate customers sign a PPA or invest in a solar rooftop, utilities lose load and revenue. Lower revenues may eventually lead to higher rates as utilities allocate fixed costs for their “steel in the ground” — that is, generation facilities and transmission and distribution systems — across a smaller rate base,

Higher rates make PPAs and direct ownership of distributed generation such as rooftop solar more attractive to customers — a situation that, were it to become cyclical, would damage the traditional utility business model.

With their long history of reliable energy delivery and deep relationships with corporate customers, utilities already have a market advantage. But they must move forward now to build on these foundations by offering such customers renewable energy products that satisfy corporate climate and energy goals at a competitive price. Capitalizing on these opportunities will be critical as utilities and the energy industry as a whole continue to evolve in the coming years.

SEPA’s research found four essentials for utilities designing renewable energy programs for their key accounts.

Stretch out cost recovery: Allocating costs to renewable program participants over time ensures a sustainable program and prevents cost shifts to nonparticipants.

Capitalize on utility strengths: Playing to their existing market advantages — such as long-term customer relationships and access to economies of scale — is precisely what allows utilities to develop attractive offerings for their key account customers.

Package costs and risks in unique ways: Developing innovative ways to balance costs and risks for green offerings can lower capital requirements and transaction costs, while allowing utilities to leverage their established business structures.

Seek out business opportunities: The corporate market represents vast and varied opportunities for utilities to diversify their customer offerings, bundle services and earn higher rates of return on their incurred risks.

SEPA continues to follow developments in the key account market closely and plans to release a more in-depth study in the coming months.