Reviewing five actions to show how industrials can invest in renewable energy

No one said the energy transition is easy. For many companies there have been cost and accounting reasons why they have not been active in investing in renewable energy. Andrew Winston writes on the Harvard Business Review website how it can be made to happen.

 

How Industrial Firms Invest in Renewable Energy, Affordably

Big companies have been buying a lot of clean energy lately – 3.5 gigawatts of renewable capacity last year alone (a good chunk of all the capacity added*). These leaders, mostly consumer-facing brands like Google, Apple, Microsoft, Walmart, and IKEA, have been covering their roofs and filling giant fields with solar panels and wind turbines. To do this, they have mostly used power purchasing agreements (PPAs) to buy their clean power. Under this financing structure, the company contracts to buy kilowatts, not the turbines and panels. They put up almost no capital and usually lower their day-to-day energy costs.

It sounds like an easy win-win, but industrial companies have had a harder time making it all work for two key reasons: costs and accounting. First, due in large part to the scale and consistency of their energy purchasing, industrials already pay the lowest rates for power. Second, signing long-term power agreements for 15 to 20 years is hard for any company to swallow, and they often struggle with how to handle the accounting (is the contract a lease? Is it a liability, an asset, or something else?). This hurdle seems especially hard for old-school, more fiscally conservative entities.

So the PPA terms that retailers and tech companies sign have not worked for the heavy guys.

Until now.

Manufacturers like Dow and Owens Corning are showing it can work for industrials as well. Both have recently contracted to buy the power from multiple 100-plus megawatt wind farms. I spoke with Owens Corning execs, catching up after working with them a number of years ago, to understand how they did it. Frank O’Brien-Bernini, the company’s Vice President and Chief Sustainability Officer, laid out the strategy he and his team used to get over the hurdles, which boils down to five key actions:

Research how others do it. They held about 40 meetings with companies that had bought renewable energy and with big project developers. Then, after their own renewables purchases, they’ve “paid it forward” and talked with other industrials.

Get early buy-in. They had framing conversations with the CEO and CFO early on to discuss any financial or operational challenges. As renewables costs have dropped, the first hurdle on cost has gotten easier, but not gone away entirely, and the accounting issues remain.

Use cross-functional teams. You need legal, accounting, procurement, energy, and sustainability involved. As O’Brien-Bernini put it, the months they spent getting the deals through their process were “faster than any company the energy suppliers had seen…but it didn’t feel fast!” His experience gibes with the findings of a new survey that PwC conducted on corporate renewable buying. Well over half the respondents reported that three or more corporate functions were “key decision makers.”

Find the right locations for the business. The company started with smaller PV systems at two Owens Corning facilities: an insulation plant and an office parking lot in Ohio. These impressed employees. Then they made the bigger moves to reduce their GHG and energy footprint. The company contracted for the power output from two new 125-megawatt wind farms in Texas and Oklahoma. As with most PPAs, the contract was a critical asset for the energy developer to take, literally, to the bank to get financings.

For Owens Corning, the locations matter. The Texas site alone produces more energy than what Owens Corning uses across its significant Texas operations. This allowed the company to claim carbon-neutral status for Texas-made products, a nice and strategic marketing win.

Seek advice on the accounting. While PPAs are the dominant model for financing corporate renewables, signing 15- or 20-year agreements can be tricky. So they got third-party advice from PwC about how to treat the purchases and commitments on their financial statements.

In total, getting these renewables deals done takes some work. It requires some solid research on deal structures and locations; organizational navigation to get everyone on board; and savvy accounting. But it’s all worth it. Almost every company that I talk to, regardless of sector, is finding deals at or below their current energy prices. Owens Corning won’t actually reveal the exact energy prices they’re paying. But O’Brien-Bernini implies strongly that it’s a good deal, saying, “This is adding value to our company.”

Execs at industrial companies often believe that they can’t find renewables cheaper than their rock-bottom power rates. They’re wrong — and they’re losing money because of it.

*The estimates on how much capacity was added to the U.S. grid vary, depending on what you’re counting (and who’s counting) from 14.5GW to 19.5GW or more. All sources seem to agree that renewables were two-thirds or more of the total.

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