Making green from green

A growing number of companies around the world are choosing to meet their energy needs with green power – and are making it pay, or at least not losing money on the deal. David Biello examines how and why these companies have made the switch

In September of last year, Co-operative Financial Services (CFS) signed an eight-year deal with Ecotricity to buy 9 gigawatt hours (GWh) of wind power per year. The innovative deal financed the construction of at least six new wind turbines by the UK wind energy developer, supplied roughly one-quarter of the yearly electricity needs of the two divisions of CFS (the Co-operative Bank and the Co-operative Insurance Society), and was estimated to save CFS £250,000 ($450,000) over its eight-year span.

100% green power for IBM UK

That estimate was wrong.

“As electricity prices have rocketed,we’ve made another £100,000 on this contract,” says Paul Monaghan, head of sustainable development at CFS.“The deal is looking even better. In fact, I’m looking to do more of it.”

With a fixed rate for the first three years of 4.65 pence per kilowatt hour (kWh) and a price for the last five years of 10% below “whatever the market price is for brown,” Monaghan expects the contract could save the company even more over the long term. “The downside of the deal is that I am contractually bound to buy that electricity,” he says – the element of the deal which appealed to Ecotricity and allowed it to finance new wind turbines. “I’m assuming we’re still going to be around [in eight years]. I don’t think that’s a very big risk but you’d be surprised what the lawyers think.”

The upside of the deal is clear: delivering new wind power, reducing carbon emissions, helping to underscore CFS’s ethical branding – and, unusually, saving money. “Traditionally, I’ve paid a 10% premium for green electricity,” Monaghan notes.

Some companies are prepared to pay more for green power, for various environmental, energy diversification and public relations reasons. “For voluntary markets, you’re looking for locally produced renewables that are as new as possible – the types of things that get people excited to pay a premium,” says Virinder Singh, senior environmental analyst at PacifiCorp, a utility in the Pacific Northwest of the US.

That price premium has kept many corporations out of the green power market. But this is beginning to change. “There are some situations where buying electricity from renewables like wind can be cheaper,” says Craig Hanson, manager of the Green Power Market Development Group at the World Resources Institute, a Washington, DC-based environmental think-tank. “Costs are coming down.”

Evidence of greater interest in renewable energy can be found among the US Environmental Protection Agency’s ‘Green Power Partners’, whose 599 members collectively purchase 2,800GWh of green power annually in a programme that is only five years old.

The reason that so many companies are getting the green power habit is that they have found a way to make a business case out of renewables. And the biggest driver of that is price stability. “There’s a massive advantage to taking yourself out of the vagaries of the market,” CFS’s Monaghan says.

“One of the trade-offs that people recognised was the stability aspect,” agrees Edan Dionne, director of corporate environmental affairs for IBM, which has found savings through green power in both the US and the UK (see box 1). “Even people who are not in this field see the fluctuation in energy costs.”

“The second thing is the hedge this provides,” she continues. “When you cannot predict which way energy prices will go, there is some benefit that comes with being able to lock in a price.”

That, of course, depends on the utility supplying the power, and how willing it is to pass on any green electricity savings. “A lot of the time the utility takes that extra margin,” WRI’s Hanson says. “Especially if you’re in a regulated market, it’s going to take a long time for the savings to be passed on.”

But some utilities are generous, in exchange for a long-term contract. “We’re passing on the long-term stability,” says Mark Kapner, senior strategy planner for Texas utility Austin Energy. “With wind and landfill methane we can lock prices in for 25 years and into the future. We know what our costs will be and that certainty is worth a lot to us.”

“We designed our programme to essentially operate in the same way as applying for a mortgage in a fixed rate or a floating rate,” he explains. “Some choose to commit for 10 years, some for five years.”

Building cars the GM way – powered by landfill gas

But purchasing green electricity isn’t the only way that corporations save money through green power. Often, the approach involves replacing their power purchases with on-site generation. Wood product companies like Weyerhauser are using the left-overs from their pulp and paper operations to create electricity and heat. This directly lowers their corporate energy costs. “Biomass residues can be cheaper than fossil fuel alternatives, particularly if the residues are a by-product of a manufacturing process,” WRI’s Hanson says.

Other waste materials can green power supplies. Automaker GM has converted five of its manufacturing plants’ boilers to run on landfill gas rather than natural gas and, through 2004, had saved at least $7.5 million (see box 2).

The story is the same in Europe, where policies such as Germany’s feed-in tariffs – which guarantee prices for renewable energy – and the continent-wide European Emissions Trading Scheme (EU ETS) convinced DuPont to convert a manufacturing plant in Uentrop from natural gas to biomass-fired combined heat and power boilers. The fuel switch reduced the chemical company’s need to purchase allowances in the EU ETS and also allowed it to sell electricity into the grid at a guaranteed rate. “They sold the megawatts to the grid but kept the thermal for themselves,” Hanson says. “It was a cost-effective switch and it saves them money.”

Unfortunately, since it is only direct emissions that are capped under the EU ETS, it may not provide much of an incentive to buy renewables from the grid. “There’s more of an incentive to switch from fossil fuel on site,” Hanson says, having begun research on the European market in advance of launching a European version of the Green Power Market Development Group sometime this autumn.

“The biggest driver in Europe is still renewables obligations [where countries require a percentage of power supplied to the grid to be from renewable sources] or things like the feed-in tariffs.”

That makes on-site generation more attractive and, with cost barriers to such installations coming down, many companies are finding their future lies in solar power from their rooftops. Companies such as SunEdison of New Jersey now offer to install and manage a solar photovoltaic (PV) array on a store rooftop in exchange for a guaranteed price for the electricity produced over a long-term contract. SunEdison arranges the deal, BP – the PV manufacturer – guarantees output, and investment firms like Goldman Sachs or Hudson Partners put up the initial capital costs for a company like Staples – an office supply store with a host of retail buildings throughout the country – to install solar panels.

In essence, SunEdison has created a solar PV bond with a guaranteed cash flow over a certain term. “It’s a financing strategy that gets around the barrier to corporate use of solar PV,” Hanson says.

The biggest obstacle to greater corporate uptake of green power remains cost. But the burgeoning market for renewable energy certificates (RECs) – a certificate representing the green attributes of a MWh of power – in the US may point a way around that problem.

With RECs, companies can support green energy via least-cost technologies throughout the country. Thanks to certification programmes such as the Center for Resource Solutions’s Green-e, they can be sure that they ‘own’ the green attributes of the electricity produced. They can also point directly to the wind farm (or other renewable resource) they helped fund. And, more often than not, the companies pay less per REC than the premium a utility will charge for green electricity.

Plus, companies with operations across a country can ‘green’ their nationwide electricity needs in one transaction, lowering costs.

But the growing popularity of green power purchase programmes is having a perverse effect: cost-effective opportunities for corporate power purchases are getting more difficult to find. So, while it may be easier to sell the idea to the board, finding the right project may be more challenging.

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BOX 1 BIG BLUE GOES GREEN

Renewable energy contracts can pay, no matter where you are in the world. From Texas to the UK, IBM has been able to turn a profit on purchasing renewable energy. “Cost is definitely a part of the equation,” says Edan Dionne, director of corporate environmental affairs for the multinational company. “What we want to do are things that make both environmental and business sense.”

So far, that has meant buying renewable energy in Texas as soon as it became available in 2000. “At the time, we predicted it would cost about $30,000 in premium for the duration [of the five-year contract],” Dionne says.“We did it anyway for a number of reasons. One is anticipating fluctuating energy prices; we thought this was something that would be a hedge. Second is that there is really something to be had from cost stability.”

In fact, the company was so convinced that it went ahead and signed two more five-year deals in 2002 and 2003. Of course, mandated subsidies for renewables that brought the price to 1.7¢/kWh didn’t hurt the initial decision. Still, it was a premium price – at the time.

Now, with power prices at 2.8¢/kWh, the company is racking up savings and should continue to do so throughout the life of the contract. “All three contracts in 2004 ended up saving us $60,000 for the year,” Dionne says. “So far, it just keeps climbing.”

The company pulled a similar trick in the UK. With the government planning to impose its Climate Change Levy on the industrial use of ‘brown’ energy, in 2000 IBM began aggressively to pursue renewable energy resources. “In the UK, supply is not that plentiful,” Dionne says.“You have to really work at it.”

But, by 2001, when the levy took effect, the company was able to acquire a “significant” portion of renewable energy for its UK operations, Dionne says. “Through the years we were able to increase that portion until now, when we are at or near 100%.”

As a result, IBM entirely avoids the Climate Change Levy on its power, a saving of 10% to 15% of its overall energy costs. Plus, it keeps more greenhouse gases out of the atmosphere. “In 2004,we procured 193 million kWh of electricity from renewables,” Dionne says. “That corresponds to 83,000 tons of CO2. And it’s cost-neutral.”

Thanks to efforts in Texas, the UK and elsewhere, IBM has gone from sourcing 2.5% of its energy needs from renewables to 4% in just the past two years – amounting to more than 200GWh worldwide. “I would say there are two main reasons: one is the internal commitment to environmentally sound energy management,” Dionne says. “Equally important is minimising the cost of doing business.”

BOX 2 TURNING TRUCKS INTO TRASH

Decomposing rubbish helps to fuel the production of GM cars in five US states.Thanks to manufacturing facilities located near large enough, deep enough landfills, GM can produce much of its power needs from the methane that comes seeping up as trash breaks down beneath the earth. Best of all, GM saves $500,000 per plant per year, according to Al Hildreth, manager of supply contracts and renewable energy for GM’s Energy and Utility Services.

Since 1995, when a developer approached the company with an opportunity to fuel the boiler at a power train facility in Toledo, Ohio, GM has actively pursued landfill gas opportunities. “We’ve kind of turned the table from the original ones where it was a push project,” Hildreth says. “Now we go off and try to pull projects along.”

In fact, GM has become the largest landfill gas user in the US, burning more than 2,000 billion British thermal units worth every year, more than four times as much as its nearest competitor. But it isn’t easy to find such projects, according to Kameshwar Gupta, manager of planning and programmes for GM’s Energy and Utility Services. “First, you have to be near a landfill location that has enough of this landfill gas available. You also have to have a boiler that you can directly burn it in,” he says. “There are not too many of those opportunities out there.”

Nevertheless, GM has managed to find five projects, including a coal boiler that was converted at the Orion assembly plant in Michigan. “Internally, once you have a couple of successes, things tend to go pretty smoothly,” Hildreth says.

But the long-term contracts – typically 10 to 15 years – can still be a bit of a stumbling block. “That part we have to sell internally based on the plant, the product, what type of a plant it is, and what risk we incur in signing a long-term contract,” Gupta says.

Nonetheless, the company is looking for other on-site opportunities, including a potential solar power project that could be online as soon as January 2006. “We’ll have a net positive cash flow from the first day,” Gupta says, assuming the project moves forward.

Ultimately, projects like these simply make business sense. “In all of the work we do we need to take a look at three aspects: environmental, social and economic,” Gupta says. “These projects make sense on all these fronts.”

BOX 3 BT - BUYING IN BULK

In October of last year, British Telecom (BT) became the world’s largest buyer of ‘green’ electricity. A three-year contract with Npower and British Gas provides the 2,100GWh of electricity per year needed to run the company’s 6,500 telephone exchanges, satellite earth stations, offices and depots. Best of all, at the moment, it is doing so at no additional cost.

Making the switch – BT’s exchanges now run green

“We have a fixed term and a market-related term,” explains Neil Winfield, energy commercial manager at BT. “We are in the fixed term and we are enjoying parity prices. But there is an unfixed term that will be market-related and we may see an increase.”

Of course, BT had been prepared all along to pay slightly more for green energy but quickly discovered it could source all of its needs for no extra money whatsoever. “If it was price neutral, the board said: ‘Why not do this?’” Winfield recalls.

There is a wide range of electricity included in the overall mix, ranging from heat and power generated by “flare-off from petrochemicals” – waste energy which the UK classifies as ‘green’ – to “wind turbines on the sides of hills,” Winfield says.

Ultimately, Winfield predicts, it will not be enough as the company continues to grow. So BT is looking to develop its own on-site renewables. “We have trial sites with wind turbines to supplement the power at telephone exchanges,” Winfield says. “We believe it’s not all going to be buying from the market – some of it you’re going to have to provide yourself.”

And that’s where green energy may get expensive. “The payback is three to five years for large wind turbines and 10 years for a smaller, embedded system,” Winfield says. “Electricity has got to get quite a bit more expensive for small wind turbines to get into single-digit paybacks.”

But green energy offers other benefits, such as security of supply and reduced greenhouse gas emissions. And, with the advent of the EU Emissions Trading Scheme and the ongoing UK ETS, the latter are growing more and more valuable – and BT’s green energy programme is delivering 325,000 tonnes of carbon dioxide reductions every year.