Big Companies Go DIY on Clean Energy

FROM GOOGLE TO AMAZON, FROM 3M TO APPLE AND MICROSOFT, MORE AND MORE COMPANIES ARE DOING POWER PARTNERSHIPS AGREEMENTS, FOR REASONS OF IMAGE OR CONVENIENCE

by Matteo Di Castelnuovo, Dept. of Economics, Bocconi
Translated by Alex Foti


According to the International Energy Agency, in 2015, for the second consecutive year, global CO2 emissions resulting from the production of electricity have remained stable despite the fact that the world economy continued to grow (although only by 3%) and prices of fossil fuels continued to fall (-45% in price of oil during 2015). The main factor behind such a result is to be found in the increase in the contribution of renewable energy, which represents over 90% of new electricity generation (of which almost 50% coming from wind turbines).

In fact, according to a recent study by Bloomberg New Energy Finance, in 2015 investment in renewables had a record year to the tune of $329 billion, six times the amount invested in 2004. But 2015 was a also record year for new installed capacity of the two forms of green energy: 64 GW of wind turbines were installed to generate electricity, as well as 57 GW of solar panels. To understand the magnitude of such a leap, you migh consider that 57 GW was the peak in electricity demand reached in Italy in 2015.

Despite having slowed investments with respect to the previous year (-18% compared to 2014), Europe still remains world leader in green energy thanks to renewable power-generating capacity built over the last 15 years: in the last year wind+solar energy have been the main sources for the production of electricity, reaching nearly 30%, against 28% from nuclear, 26% from coal and 15% from gas. Specifically, in Italy renewables account for 40% of total electricity production, while in Denmark as much as 42% of its electricity needs are met thanks to wind sources only.

Turning to the largest economy in the world, we note that for the United States 2015 was a banner year for clean energy: $56 billion was invested (an 8% increase compared to 2014), with 70% of the new power capacity consisting of wind and photovoltaic plants. In addition, according to the Energy Information Administration, in 2015 CO2 emissions resulting from US electricity production (accounting for a third of total emissions) were down by 12% compared to the levels of 2005. In this case the reduction in emissions was mainly due to the replacement of coal with gas in electricity production, but was also caused by the growth of renewable sources in power generation.

In addition, 2015 was a record year for the United States for a peculiar and innovative type of investment, known as large-scale off-site renewable procurement. This concerns large companies outside the energy industry (such as Google, Microsoft, Apple, Facebook, General Motors etc.) which sign long-term agreements known as Power Purchase Agreements (PPAs) with energy companies (such as Invenergy) for the supply of electricity coming from solar plants or wind farms, power stations which often are yet to be built and are located off-site (i.e. they are not the usual photovoltaic panels that companies put on the roofs of industrial buildings). In 2015, renewable capacity contracted through this particular type of agreement was more than 3 GW, a 600% increase compared to two years earlier. Although Google remains the biggest buyer in this new segment, 2015 was marked by first-time buyers like Amazon, Procter&Gamble and HP, which now represent 70% of the PPA market. In 2016, 3M joined the list, by signing the first PPA of its history.
 
What motivates companies to sign this type of contract, especially in a period of very low prices for fossil fuels? First, there is the need to improve one’s image in terms of environmental sustainability, especially for those companies that deal with the general public. A second reason is more strictly economic and stems from the need to mitigate the volatility and uncertainty of energy costs, linked to jittery oil prices, by switching to long-term supply at a certain price.