Tech giants' investments in renewable power purchase agreements lead the way: Saving money while the sun shines (and the wind blows)
Information and communication technology giants are leading the private sector in the uptake of power purchase agreements and direct renewable investment. There is a strong business case behind their investments, which also contributes to their overall carbon emissions reduction plan
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OVERVIEW
During the 1980s oil and gas companies represented 25% of the Standard & Poors (S&P) 500 index, seven of which were in the top ten. Today there are none, and by the end of 2019 only represented 4.3%. Undoubtedly this figure has dropped further, thanks to covid-19 and the bottoming of oil prices. An evolving economy has paved the way for information and communication technology (ICT) and financial sectors to now fill these top spots, with big tech giants commanding half of the top ten positions within the S&P 500.
ICT is in the supply chain of almost every organisation and is growing faster than any other sector. A 2015 study by ICT academic Anders Andrae forecasted that the ICT sector could be responsible for 20% of all electricity consumption by 2030, with data centres and network transmission the main consumers. A global need to combat climate change and decarbonise by 2050 has given these electricity intensive sectors a reason to commit to renewable energy, and many have.
The largest players in ICT – Amazon, Apple, Facebook, Alphabet’s Google and Microsoft have all made commitments towards decarbonisation and have already taken significant steps. These companies are not alone, with a global range of companies across multiple sectors committing to RE100 – a global leadership initiative bringing together businesses committed to 100% renewable electricity. Members of the RE100 have either set or achieved their renewable energy targets.
At this current juncture with fossil fuel majors and markets dropping, it is likely to stimulate further private investment into low cost deflationary renewable energies. This report specifically investigates how some of the largest ICT companies and banks in America are investing to address their energy emissions and why.
These investments come in two forms, including power purchase agreements (PPAs) with renewable electricity providers, and direct investment into localised clean energy generation. These investments can support or replace each other, and both are strongly supported by energy efficiency improvements.
A PPA provides a good business case to acquire 100% renewable energy, as it allows companies to lock in long term lower pricing in order to reduce future electricity price uncertainty. Commitment to renewable energy becomes a part of their brand identity, giving them the opportunity to promote themselves as good corporate citizens. This appeals to customers, employees and increasingly, investors. Approximately 10% of new solar or wind projects in the USA are directly supported by corporate PPAs with plenty of scope for more.
In the case of financial institutions such as banks, nine of the ten largest banks in the USA have committed significantly to renewable energy within their operations. However many of these banks still provide huge amounts of financing for the oil and gas sector. To combat their portfolio emissions seven of the ten banks have set meaningful targets to provide sustainable, low carbon or renewable energy financing.
In the absence of global cooperation, the private sector can significantly contribute in reducing emissions and has enormous opportunity remaining. Governments can lead and boost this potential with investment settling and appropriate regulatory frameworks, if not, they should at least get out of the way.
KEY INSIGHTS
- Electricity is one of the major costs for the ICT sector, especially when it comes to data centres and network transmission. Companies such as Apple, Amazon, Facebook, Alphabet's Google and Microsoft are using PPAs to make long term investments to reduce prices and future uncertainty of these costs.
- Of the ICT giants, Apple may currently have the most significant impact on overall emissions action by getting 23 suppliers to also commit to 100% renewable energy. Supply chain emissions from manufacturing processes and building emissions are often larger sources.
- Microsoft’s competitive investment in renewables gives them further advantage over simply the improved reliability and lowered costs of key operating outputs. It appeals to two key stakeholder groups, their employees and customers. When a company makes the kind of margins Microsoft does, a long term investment in reducing its emissions give them an edge in hiring the best and brightest, but also helps retain their clever and predominantly younger employees. This appeal is not lost on customers, having this edge over competitors makes financial sense.
- There is a growing key source of differentiation over exactly how much “additionality” a company is contributing to the overall supply of renewable energy in the grid through its commitments. Consequently, there has been a marked increase in direct investment in renewable energy projects, especially co-located to energy hungry facilities such as data centres, factories and breweries.
- If all the RE100 companies contracted under PPAs meet their commitments globally, they would generate 105GW of new solar and wind power as per Bloomberg New Energy Finance (BNEF) estimates.
- The more electricity intensive an industry, the larger the financial saving on account of locking in long-term lower prices. Higher margin industries are making huge capital investments or contractual commitments to bring down costs, while lower margin industries with less freedom to deploy capital are focusing more on energy efficiency gains and making smaller steps towards renewable energy.
- Banking and finance is perhaps the most significant example of a sector that has committed significantly to renewable energy but is slow to address its indirect contribution to emissions. Nine of the ten largest banks in the United States have committed to 100% renewable energy in their operations, seven of which have set meaningful targets to provide sustainable, low carbon or renewable energy financing. However, on the other hand, they all continue to provide huge amounts of financing to the oil and gas sector.
- It can be difficult for smaller companies to participate in PPAs because of the commercial effort required and their lack of bargaining power. However, as project developers get bigger and more sophisticated, intermediaries will begin to offer aggregated off-take products, opening up the market across the consumer size.
- The lower average prices available in renewable PPAs as compared to conventional electricity prices will put added pressure on traditional commercial and industrial (C&I) electricity providers. One unintended consequence is retailers that lose revenue in the C&I sector seek to make it up by increasing residential prices.
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RELATED QUOTES
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There’s an enormous opportunity remaining. We view commercial and industrial demand as a centrepiece of our market outlook moving forward. It’s a terribly important sector that’s going to drive demand in the absence of any federal policy associated with renewables.
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