Corporate Green Power Procurement

A corporate energy user can pursue a variety of different strategies to integrate renewables into its energy portfolio. For instance, a firm can purchase from its utility or retail power supplier electricity generated from renewable resources or purchase renewable energy certificates (RECs) to "green up" its electricity supply. In addition, a company can install on-site renewable energy generation systems such as solar photovoltaic units. Alternatively, companies may find it strategically attractive to take an equity stake in a renewable energy project, receiving a financial return, power, and/or RECs in return.

The Business Case for Green Power

Corporations can gain a variety of valuable business benefits by switching to renewable energy. These business benefits include lowering or stabilizing operating costs, reducing emissions, and strengthening stakeholder relationships.

Lowering or stabilizing operating costs
A common misperception is that renewable energy is always more expensive than energy from conventional sources. But many companies are finding that under the right conditions, this is not necessarily so. In fact, some firms are switching to renewable resources in order to reduce their energy costs.

Several types of on-site renewable energy projects can cut costs. Substituting landfill gas for natural gas in industrial boilers can save money for firms that have thermal energy loads. Companies in the forest products industry combust wood wastes to generate heat and electricity at their processing plants. Using biomass residues as fuel reduces their energy costs compared with that of buying natural gas or electricity from their retail power suppliers. This is particularly true if the residues are a by-product of a manufacturing process (e.g., food-processing or wood mill wastes), if the residues would have incurred a "tipping" fee if dumped in a landfill, or if they already are being collected near the point where they would be used as fuel (thereby reducing transportation costs).

In order to lower the cost of their electricity, some companies with sufficient land consider installing on-site wind turbines that deliver power directly to their facilities. Power from wind turbines located at a corporate facility can sometimes be cost competitive, especially if the wind resource is attractive and the company can avoid utility transmission and distribution charges by having the wind power delivered directly to the nearby facility.

Companies may also switch to renewable resources in order to hedge their energy costs against volatile fossil fuel prices. Renewable energy is more likely to offer corporate energy users with a hedge value under certain conditions. For electricity, these conditions include:

• The wholesale prices of the key primary fuels that generate power (e.g., natural gas but not nuclear) fluctuate relatively frequently.
• The price changes of primary fuels are passed on to end users and updated frequently (more likely in deregulated electricity markets).
• The corporate end user is able to sign long-term fixed-price power contracts.
• The corporation's retail electricity provider is willing to offer long-term fixed-price green electricity. 1

Reducing emissions
Another business rationale for using renewable energy is to lower the emissions of airborne pollutants and greenhouse gases. Renewable energy can help companies in markets where these emissions are regulated as well as where regulations have not yet been introduced.

Switching from using fossil fuels to renewable energy can lower the amount of regulated emissions. Emissions reductions, however, are often not an end among themselves. Rather, the goal is to improve the corporation's operating margins. When regulated, emissions effectively become monetized; emitters incur costs in the form of pollution taxes, allowance/permit costs, emissions control equipment expenses, or other mechanisms. Renewable energy can lower these emissions-related operating costs by reducing emissions, a financial impact that is readily quantifiable. The use of renewable energy can be an attractive emissions reduction strategy for corporate facilities regulated under mandatory carbon dioxide (CO2) or greenhouse gas cap-and-trade emission allowance systems, such as those under the Kyoto Protocol.

Renewable energy can help firms lower regulated emissions besides CO2. In order to satisfy local air quality regulations, some companies may want to cut the amount of sulfur dioxide (SO2), nitrogen oxides (NOx), and particulate matter (PM) released from their manufacturing facilities. For these companies, switching from fossil fuels to renewable resources may be an attractive option. Converting an industrial boiler from using coal to biomass, for example, or co-firing biomass together with coal can reduce a facility's SO2, NOx, and PM emissions. 2

Strengthening stakeholder relations
Another business case for using renewable energy is to strengthen a company's relationships with its various stakeholders, including customers, local communities, employees, and shareholders.

• Customers: Some companies try to differentiate their brands from those of their competitors by being seen as "green" or as environmentally responsible corporate citizens. Using green power can help enhance this corporate image or improve a company's reputation by demonstrating leadership in environmental performance. WRI's experience suggests that companies in business-to-consumer industries more commonly use this business rationale than do companies in business-to-business sectors. Other firms leverage their use of green power to differentiate not only corporate brands but also individual products.

• Local communities: On-site renewable energy generation systems can establish a company as a responsible neighbor in local communities.

• Employees: Using green power also may enhance a corporation's relations with its employees, an important audience for corporate management. A recent KPMG survey of 1,600 of the world's largest companies in sixteen industrialized countries found that approximately half believed that employee motivation, and therefore the "war for talent," was a major driver of corporate social responsibility (CSR) activities. Other commentators, as well, have observed that many employees want to work for firms that have a mission beyond just increasing shareholder value.

  Switching to renewable energy sources can be one element of a CSR strategy. Through this strategy, a company communicates and substantiates corporate values that may be important to both current and prospective employees. A commitment to green power therefore can help make its employees proud of their employer and thereby help the company attract high-quality employees.

• Shareholders: Renewable energy can help strengthen a company's image with shareholder activists and some institutional investors. Capital markets have entered an era of shareholder resolutions regarding climate change. Likewise, many institutional investors are becoming increasingly concerned about companies' financial and regulatory exposure regarding climate change and corporate greenhouse gas emissions.

  The emergence of the Carbon Disclosure Project illustrates such investor concern. Furthermore, some investors perceive strong environmental performance as an indication that corporate management has a forward-looking strategy and runs a tight ship. Indeed, several recent studies have shown a correlation between environmental performance and financial performance. 3 Switching to renewable energy is one way that a company can signal to both shareholder activists and institutional investors that it is managing its greenhouse gas emissions and, therefore, climate-related risk.

Four general observations should be kept in mind when considering the various business cases. First, not every renewable energy opportunity has a strong business case for corporate energy end users. In some situations, the potential business benefits do not justify the cost of renewable energy. Second, the particular business case that is relevant to management often varies among companies and even among facilities within the same firm. Furthermore, because of differences in regional incentives, a renewable energy project that is financially attractive to a corporation's branch in one region may not be economically viable in another. Third, some renewable energy projects or purchases can provide more than one business benefit simultaneously. That is, one benefit does not preclude another. Finally, many of the benefits provided by renewable energy also may benefit energy users outside the corporate sector, including universities and government agencies.