by Timothy Hassett and Karin Borgerson - March 2009
This report offers strategies and approaches that can be valuable to a wide range of firms looking at potential investments, contracts, and facility operational decisions regarding use of renewable energy. It provides guidance on how to consider the choice to finance or purchase renewable technologies for use on corporate facilities and advice on where to go for further information.
In recent years, many U.S. corporations have deployed renewable energy systems at their headquarters, industrial facilities, and retail stores. These include large corporations—such as Google, Johnson & Johnson, Macy’s, Staples, and Wal-Mart—and smaller firms, such as dairy farms, hotels, restaurants, wineries, and a ski resort.
Many companies, however, have yet to take advantage of the incentives available for investing in on-site renewable energy and the opportunities such investment brings. The purpose of this report is to provide a detailed introduction for such businesses on deployment and financing options for renewable energy systems, as well as on the risks and benefits involved. In so doing, our aim is to promote the scaling up of renewable energies as part of a transition by the United States to a low-carbon, high-energy-efficiency economy.
Key messages from the report are summarized in the following pages.
Deploying Renewable Energy: The Benefits
Certain renewable energy technologies—such as large-scale wind power, solar thermal water heating, and geothermal heat pumps—are already economically competitive with traditional sources of energy, such as fossil fuels. Even when the cost of power produced by renewables is more than average utility rates, many companies can still save money by using renewables to institute “peak shaving.” In peak shaving, companies produce renewable energy during periods of peak power use, when utilities often charge higher rates. In addition, government incentives can significantly reduce the actual cost of renewable systems. These incentives include federal, state, and local tax credits; tax deductions; accelerated depreciation; loans; production incentives; rebates; and grants. Specific benefits for companies deploying renewable energy on-site can include:
- Reducing energy costs or creating a hedge against possible future energy price increases.
- Improving energy reliability at a company’s location (depending on system configuration).
- Helping companies to be environmentally responsible and enhance their reputation through a reduction in greenhouse gas (GHG) emissions or a visible commitment to renewable energy.
At a Glance: Deployment and Financing Options
When considering on-site renewable energy deployment, it is important to measure the quality of a specific site’s renewable energy resource (such as wind or sun). If a site is acceptable, there are numerous options for deploying and financing a renewable energy system (compared below). In many of these options, a company will own the generation assets deployed at its site, but a company can still benefit even if it does not own the assets.
One fairly standard option is the Direct Ownership of Power (Use of Power). In this scenario, a company purchases or leases a renewable energy asset for on-site deployment and uses the power itself and, in many cases, sells some excess power to the grid.
A far less common option is Direct Ownership of Power (No Power Use). In this scenario, a company does not use most of the power generated by the system installed at its site, but rather uses the system primarily to sell power to the grid. This scenario is not yet common due to a number of factors, including disincentives created by government regulation (such as limitations on the size of systems that qualify for a billing practice called “net metering”). This deployment model could grow, however, if governments adopt “feed-in tariffs,” which establish a guaranteed minimum electricity tariff.
Companies seeking to limit their initial capital commitment, or earn a return on a previously underutilized asset (such as a rooftop), can consider Third-Party Ownership of Power. In this scenario, a third party deploys renewable energy assets at a company (the site host) and:
- sells the power to the site host under a long-term power purchase agreement (Use of Power), or
- leases the space and sells the power to the grid (No Power Use).
Identifying and Deploying a Renewable Energy Option
To assist companies in making informed decisions, we have defined objectives and risks commonly associated with on-site renewable energy deployment and developed a schematic of the basic stages involved in deployment. In order to choose the best deployment and financing option, a company must define its objectives and understand risk trade-offs. Objectives might include:
- Reducing Energy Costs: Either reducing energy costs or creating a hedge against possible future price increases.
- Improving Energy Reliability: Although most renewable technologies cannot provide sole back-up power for mission critical needs, an on-site deployment can improve energy reliability if it includes energy storage (such as a battery).
- Enhancing Brand/Reputation: Through a visible commitment to renewable energy and/or a reduction in greenhouse gas emissions.
- Using Tax Appetite: If a company has sufficient taxable income, it can benefit by taking advantage of tax-based incentives for deploying renewable energy.
Risks associated with deploying on-site renewable energy can include:
- Dispatch Risk: Power is not generated by an on-site deployment for any reason.
- Operational Risk: The system does not perform as anticipated. This risk is typically assumed by the entity responsible for operating and maintaining the system.
- Technology Risk: Technological improvement creates an opportunity cost for someone that has already invested in the older technology.
- Transfer Risk: Renewable energy assets may have to be redeployed when a company moves or changes business locations.
- Credit Metrics: A renewable energy investment may affect the financial ratios that analysts use to assess a company.
Successfully defining objectives and understanding risks can help a company make the best decisions about deploying renewable energy systems. The basic stages in considering an on-site renewable energy deployment are shown schematically in Figure 1 on page 3 of the Full Report.