Big deals: Corporations and renewable energy

MGM Resorts International, a hospitality and entertainment conglomerate, made waves in the energy world last year when it agreed to ante up $87M USD to cut ties with its public utility, Nevada Power.  The glitzy slot machines and round-the-clock action at MGM’s Nevada casinos require a whopping 171MW of capacity to serve, with MGM amounting to almost 5% of Nevada Power’s sales.

Betting the [wind] farm
The move by MGM to go all-in on off-site procurement was based on a calculated gamble that the company would be able to independently source their own clean energy at a better price than through the utility. Going forward, MGM will purchase their own clean energy through Tenaska, an independent energy company.

The MGM case study is just one data point in a larger trend towards off-site procurement of clean energy by major corporations.  While most corporations are not going as far as MGM (to the point of leaving their utilities), it is increasingly common for large firms to take direct control of their power procurement decisions. Rationale for direct procurement varies across companies, but two principal motivations rise to the top:

1.     Meeting sustainability goals - RE100, a global collection of major businesses committed to renewable power, counts 88 members who have committed to go ‘100% renewable’. From Apple to Walmart, these companies need to address the fact that the utilities they buy their power from do not offer 100% renewable electricity.  In order to reach the targets they have set out from themselves, these businesses are looking elsewhere to secure their own supply of renewable energy.

2.     Hedging/price stability – In many energy intensive sectors, such as the automotive industry, energy constitutes a major cost input into manufacturing.  These companies are exposed to fluctuations in energy prices and often seek to lock-into long-term power purchase agreements to reduce uncertainty, even though they may lose out should the wholesale power price drop in the future. In the short-term, firms are often able to source clean power at lower prices than they currently pay to their established utilities.

In countries with a less developed grid, direct energy procurement for large energy users is not so out of the ordinary. Indeed, even in the developed world, many heavy industrial users will be located near a power source, or will develop one in conjunction with the plant. Off-site procurement is something different altogether, as it requires the existence of both a robust grid as well as independent power producers to generate and sell the electricity.  In the end, the electrons generated and put onto the grid by the producer are not the same as the ones consumed by the purchaser, as with on-site generation.

Where the chips may fall…
Right now, it is only the largest of corporations engaging in these sorts of power purchase agreements.  According to Hervé Touati of the Rocky Mountain Institute, among Fortune 100 companies, 12% have signed PPA’s of this nature.  Looking at the remaining 400 firms within the Fortune 500, however, that figure falls to 1%.  The reason for this is, in part, that power producers find it more efficient to target large companies who can, for example, purchase the entirety of a typical 100MW plant.  As the demand among the largest companies is satisfied, we can expect to see producers targeting the next tier of companies by either selling the 100MW project via, say, 10 different agreements, or by building smaller (and therefore less efficient) generation projects.  This doesn’t come without difficulty, however.  Each off-site deal involves significant coordination between the buyer and seller, as well as two additional parties: the utility and the public service commission, or regulator.  Increasing the number of buyers significantly increases the time, effort, and risk of developing a project, all else equal.

Nonetheless, this trend represents a significant opportunity for independent energy providers to bolster their pipeline of projects.  Utilities, on the other hand, should beware.  Losing major chunks of demand, as in the case of Nevada Power and MGM, can result in higher power costs for the remaining customers, as the utility seeks to recoup the cost of their fixed asset base over fewer users.  In the beginnings of a death spiral, this makes it more likely for more major customers to go external, thereby exacerbating the problem for those small users left behind.

For many years, utilities have enjoyed a relatively safe existence, protected by regulatory regimes which guarantee a fixed return on assets.  But if they fail to act on the fact that their customers are demanding more and more say in where their power comes from, this could quickly turn into a game where the house doesn’t always win.

March 1, 2017 by: Andrew Dean, MBA 2018