The New Economics Of Renewable Energy

The New Economics Of Renewable Energy

Costs of wind and solar energy have dropped, making renewable energy a viable option for many businesses.

When Steve Hansen makes the case for why businesses should care about renewable energy, he doesn’t start off with the save-the-world argument.

Instead, the director of business development for Mortenson Construction’s solar and emerging renewables group says it’s far easier—and more effective—to skip the politically charged climate-change debate and get right to what most businesses care about: the bottom line.

Focusing on the financial case allows any energy-related preconceptions to fall by the wayside.

“All of us in the renewable energy business spend a lot of time evangelizing about its benefits—you really have to if you’re going to get over some of the cultural hurdles to seeing renewables as a baseload source of power,” Hansen says.

In persuading business customers to integrate renewables into their energy mix, he and other backers now have a clear starting point: The costs of producing wind and solar power have plummeted in recent years.

“I’ve been in the environmental business in a lot of different forms since the 1980s, and back then, there was a feeling that ‘alternative energy’ was kind of a fad,” he says. “Some of the people who occupy the decision-making chairs in business still might view it that way: ‘Yeah, this is green, therefore this is not efficient or economical.’ ”

Whenever he mentions greenhouse gas emission reductions, he always precedes it with a conversation about how the economics of renewable energy have changed.

For Mortenson and other members of the renewables community the business argument is basically this: Prices for fossil-based electric power sources such as coal and natural gas continue to be volatile and are rising long-term. But renewable sources have eternal production price certainty: The wind and the sun will always be free. Meanwhile, the per-unit cost of delivering renewable electricity to the market is nearing—and in some cases already surpassing—parity with fossil fuels.

Policy changes mean there are also new ways for Minnesota businesses to tap those economic benefits, such as the arrival of community solar gardens.

In a new solar trends report published by Mortenson researchers, 69 percent of 200 industry pros it surveyed in October believe prices for power generated by utility-scale solar installations will reach full parity with coal-generated power within at least five years, and perhaps sooner.

Mortenson, a Golden Valley-based contractor, operates the third-largest solar power engineering and construction business in the United States.

The optimism expressed in the survey is backed by some key facts. The price of power generated at such large-scale solar arrays has fallen by 70 percent since 2008, according to the Lawrence Berkeley National Laboratory, and U.S. Department of Energy figures show that the cost of producing wind energy in some areas of the country has nosedived from $71 per megawatt-hour in 2008 to $45 per megawatt-hour in 2013, making it competitive with fossil fuel generation.

Given those rapidly falling production prices, renewable backers such as Hansen say the economic case for businesses to at least stay aware of new developments in the field is getting stronger.

Ecolab’s solar initiative

One big Minnesota company that wants to take the solar plunge is St. Paul-based Ecolab. It announced in January it plans to derive all of the electricity it uses for its Minnesota R&D and engineering facilities from solar power—some 552 million kilowatt-hours over 25 years.

0615_RenewableEnergy_S01.jpg This solar array was installed last fall atop an apartment building in the Longfellow neighborhood of Minneapolis.
Photo from Applied Energy Innovations 0615_RenewableEnergy_S02.jpg These solar panels are in use at St. John’s Abbey in Collegeville, Minn.
Photo from Xcel Energy

The deal was the first of its kind in the state. It takes advantage of the new community solar garden regime, which has recently come into effect after being introduced as part of the 2013 Minnesota Solar Energy Jobs Act. The law allows companies and individuals who are unable or unwilling to set up solar panels on their own properties to become subscribers in offsite solar farms. They pay a set price over a 25-year period, then deduct that amount from their utility bills.

That long-term price certainty allows subscribers to keep their energy costs stable far into the future. In Ecolab’s case, the company signed on to be the key subscriber for a series of solar gardens to be built in Dakota County by SunEdison Inc. of St. Peters, Mo., part of a surge of array-building expected in the state over the next two years.

Ecolab leaders declined to comment for this article, but the company move is seen as a prime example of how businesses that may have once dismissed renewable energy as irrelevant to them need to reexamine the landscape.

However, in late April, Xcel Energy expressed concerns about large solar developments planned by businesses, and Xcel wants to enforce size limits.

Environmental attorney David Quinby, chairman of the energy development practice group at Stoel Rives LLP in Minneapolis, says regulatory changes, technological advances and the public image benefits derived from committing to renewables are motivating some of the nation’s top corporate players to make new energy moves.

“The thing that’s really happening is that the big technology companies like Yahoo! have entered into power purchase agreements for wind power,” he says. “Tech companies are big energy users, so of course they are cognizant of costs. But they also want to be known as a green company.

“Meanwhile, by entering into these purchase agreements, they are also becoming key creditworthy partners for wind power developers and thus are allowing the projects to proceed.”

Ecolab’s commitment to solar power, he says, is an indication that big companies see such moves as sound business investments: “Over a 25-year period, it provides them with a ‘known’ in an unknown energy market. Regardless of one’s political persuasion, the fact is energy prices have generally gone up.”

Quinby, who helps renewable energy developers line up financing and represents them in the approval process, adds that it behooves business owners to stay on top of developments in the renewables sector.

“You need to be watching this if you’re a business,” he says. “If there are incentives, take advantage of those, or use your influence when they’re being discussed at a policy level.”


Ancillary benefits

Minnesota touts one of the toughest “renewable portfolio standards” in the country. In 2007, the Legislature mandated that Xcel Energy derive at least 30 percent of its sales from renewables by 2020, while other investor-owned utilities must meet a 25 percent standard by 2025. Xcel says it’s on target not only to meet but to exceed the standard.

That measure couldn’t have become law without at least the tacit acknowledgment of the state’s business community of the ancillary or indirect benefits to them of switching to renewables. Renewables are providing a boost to the state’s overall economy and its image as a sustainability hotbed, which backers say helps attract a much-needed young, highly educated workforce. (When this issue of TCB went to press, the Legislature was debating renewable energy standards.)

“Cleaner energy is actually an enormous economic opportunity for Minnesota—that’s a big reason for businesses to be interested in it,” argues Ellen Anderson, who chaired the Minnesota Public Utilities Commission and now is executive director of the University of Minnesota Energy Transition Lab.

In her role at the U of M, Anderson helped produce a Minnesota Department of Employment and Economic Development report published in October that indicates that 15,300 residents were employed in the clean energy sector as of last year, earning more than $1 billion in wages, and that the sector is growing more quickly than the economy as a whole.

“If we want to have a competitive region to attract a skilled workforce, we need to brand ourselves as a community that cares about sustainability and clean energy,” she says. “That’s a bottom-line issue for all businesses.”

But it’s not only about businesses reaping benefits, she adds—it’s about realizing the risks posed by not switching to clean energy.

Those risks, which generate political debates, have been accepted by some of the state’s top corporate players. For instance, former Cargill CEO Greg Page was part of the Risky Business Project, a blue-ribbon panel of business executives, academics and political leaders that assessed the risks to the Midwestern economy of unmitigated climate change. In January the panel concluded that hotter summers would result in energy prices in Minneapolis-St. Paul rising during the 21st century.

Over the past 30 years, the metro area has averaged two days per year of 95 degrees or more, but the Risky Business report predicts that number would rise to six to 19 extremely hot days by mid-century if greenhouse gas emissions are not reduced.

“For a company like Cargill that’s natural resources-based—as are so many of Minnesota’s big companies—you need to understand and be aware of those risks,” Anderson says.

Democratization of power generation

Dustin Dennison wears a lot of hats in Minnesota’s clean energy sector. He’s the founder of the Minneapolis-based solar installation and consulting company Applied Energy Innovations as well as Minnesota Community Solar, which builds large subscription arrays under the community solar program.

He’s also the newly elected chairman of the Minnesota Solar Energy Industry Association (MnSEIA) trade group. He’s got a bird’s-eye view of a burgeoning expansion of solar generation capacity in the state—a good part of it motivated by a federal investment tax credit that is set to expire at the end of next year.

“We had 14 megawatts of solar capacity in the state prior to 2013, and we’ve got 600 megawatts in development now,” he says. “MnSEIA membership has grown from 50 to 90 members in just the last year.”

His rationale as to why businesses should care about the expansion of renewables also is based in economics. He asserts that those who subscribe to community solar gardens are seeing an across-the-board savings of 8 to 13 percent on energy bills.

“If you’re a big user like a General Mills or an Ecolab and you start calculating a 10 percent energy savings every month over a 25-year period, that really adds up,” he says.

The road to an energy evolution, however, has a lot of curves, Dennison warns. It is in essence a “democratization” of power production away from monopolistic utilities such as Xcel Energy and into the hands of individuals and developers. The challenge, he says, is to “upward manage” Xcel into enhancing its status as one of the most progressive utilities in the nation when it comes to incorporating solar and wind generation sources into its grid.

For instance, Xcel and solar developers are currently sparring over how to manage the size and number of community solar gardens. Because the gardens don’t have the economies of scale that huge utility-grade solar arrays do, their production costs are steeper, and Xcel must credit their subscribers’ bills at a higher rate, thus hurting its own bottom line.

But despite the natural tensions that such newly emerging policies can create, Xcel says its long-standing commitment to renewable energy remains undiminished—mainly because it’s what its customers want.

Aakash Chandarana, Xcel’s regional vice president of rates and regulatory affairs, says that demand for renewable energy from business users is already so high that it has firmly passed from the exotic to the mainstream.

“Our customers are actually encouraging us to get more involved in renewables and diversify our energy mix, and that’s because a lot of these businesses have sustainability goals they’d like to take advantage of, and be able to market themselves to their own customers as being powered by a certain amount of green electricity,” he says.

Xcel Energy, which operates in eight states in the Midwest and West, was recently named the nation’s top utility wind energy provider by the American Wind Energy Association. Wind energy makes up about 16 percent of Xcel’s energy supply, which is enough to serve nearly 2.9 million homes.

Business customers also are interested in renewables because they can provide security of supply through diversity. Renewables, Chandarana says, set up a hedge against sharply rising prices or supply problems with fossil-based sources such as coal and natural gas. “Our take is that overreliance on any one type of source, be it a fossil fuel or be it a renewable source, poses issues on the reliability side,” he adds.

Don Jacobson is a Twin Cities-based freelance editor and writer.