GREEN POWER MARKETS - World Resources Institute

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GREEN POWER MARKETS - World Resources Institute

W O R L D R E S O U R C E S I N S T I T U T ECORPORATE GUIDE TOGREEN POWER MARKETSCLIMATE, ENERGY,AND POLLUTIONPROGRAMTHE BUSINESS CASE FOR USING RENEWABLE ENERGYINSTALLMENT 7BY CRAIG HANSONI. GROWING CORPORATE INTERESTIN USING RENEWABLE ENERGYOver the past five years, more and more corporationshave started to use renewable energy resources for theirelectricity and thermal energy needs. For instance:●●●●FedEx Kinko’s, IBM, Johnson & Johnson, and otherFortune 500 firms are buying wind-generated electricityfrom their retail power providers.Johnson & Johnson, Lowes Home Improvement,Staples, and other firms have installed on-site solarelectric (also called photovoltaic) systems to provideclean power at some of their facilities.DuPont, General Motors, Interface, S.C. Johnson, andothers are using landfill gas instead of natural gas orcoal to generate heat and steam at their industrialsites.Major corporations, including FedEx Kinko’s, Interface,Johnson & Johnson, NatureWorks LLC, PitneyBowes, Staples, and Starbucks now obtain at least 10percent of their annual electric load in the UnitedStates from renewable resources.Why are these and other firms switching to energy fromrenewable resources such as wind, solar, biomass,landfill gas, geothermal, and low-impact hydropower?This installment of the World Resources Institute’s(WRI) Corporate Guide to Green Power Markets seriesexplores this question. It identifies and discusses thethree major types of business benefits companies obtainby using renewable energy. It also illustrates these“business cases” through corporate examples.II. THREE BUSINESS CASES FORUSING RENEWABLE ENERGYWhile working with corporate members of its GreenPower Market Development Group (Box 1), WRI hasobserved that firms in the United States and abroad areswitching to renewable energy to obtain one or more ofthe following business benefits: (1) lower or stableoperating costs, (2) reduced emissions of pollutants thatpose a current or future regulatory risk, and (3) strongerstakeholder relationships. Each benefit is a “businesscase” for using renewable energy. In other words, eachconstitutes a business rationale for management toswitch at least some of the corporation’s energy supply torenewable resources.SummaryWhat is the business case for companies to use renewableresources to meet their energy needs? The WorldResources Institute’s experience working with a numberof Fortune 500 corporations over the past five yearsindicates that firms are switching to renewable energy toobtain one or more of the following business benefits:• Lower or stable operating costs. In some situations,using renewable energy can directly lower corporateenergy costs, stabilize corporate energy prices, orreduce operating losses caused by power outages.• Reduced emissions. Using renewable energy can helpcompanies reduce their emissions of greenhouse gasesand other airborne pollutants that pose regulatory andfinancial risks to firms.• Stronger stakeholder relationships. Using renewableenergy can strengthen a company’s image andrelationships with its various stakeholders, includingcustomers, local communities, employees, andshareholders.10 G Street, NEWashington, DC 20002202.729.7600 Telephone202.729.7610 Faxwww.wri.orgwww.thegreenpowergroup.orgDECEMBER 2005Printed on recycled paper


Before exploring these business cases, four observationsshould be made. First, not every renewable energyopportunity has a strong business case for corporateenergy end users. In some situations, the potentialbusiness benefits do not justify the cost of renewableenergy.Second, the particular business case that is relevant tomanagement often varies among companies and evenamong facilities within the same firm. Furthermore,because of differences in regional incentives, a renewableenergy project that is financially attractive to acorporation’s branch in one region may not be economicallyviable in another.Third, some renewable energy projects or purchases canprovide more than one business benefit simultaneously.That is, one benefit does not preclude another. Finally,many of the benefits provided by renewable energy alsomay benefit energy users outside the corporate sector,including universities and government agencies.Box 1The Green Power MarketDevelopment GroupConvened in 2000 by the World Resources Institute, theGreen Power Market Development Group is a uniquecommercial and industrial partnership dedicated to buildingcorporate markets for green power. The Group is transformingenergy markets to enable corporate buyers to diversifytheir energy portfolios and reduce their impact on climatechange. The Group seeks to develop 1,000 MW of new,cost-competitive green power by 2010 – enough energy topower 750,000 homes. Group partners are Alcoa Inc., TheDow Chemical Company, DuPont, FedEx Kinko’s, GeneralMotors, IBM, Interface, Johnson & Johnson, NatureWorksLLC, Pitney Bowes, Staples, and Starbucks.More information about the Group and its activities can befound at www.thegreenpowergroup.org. This websiteincludes publications, corporate renewable energy casestudies, background information about various green powertechnologies, and an online green power marketplace. Thewebsite also contains the Green Power Analysis Tool, aMicrosoft Excel–based tool designed to help managersevaluate green power projects from an integrated financialand environmental perspective.III. LOWER OR STABLE OPERATINGCOSTSIn some circumstances, using renewable energy candirectly lower a corporation’s energy costs, stabilizecorporate energy prices, or reduce operating lossescaused by power outages.Lower corporate energy costsA common misperception is that renewable energy isalways more expensive than energy from conventionalsources. But many companies are finding that under theright conditions, this is not necessarily so. In fact, somefirms are switching to renewable resources in order toreduce their energy costs.Several types of on-site renewable energy projects cancut costs. Substituting landfill gas for natural gas inindustrial boilers can save money for firms that havethermal energy loads. Landfill gas typically is lessexpensive than natural gas, especially since the price ofthe latter has increased 75 percent over the past threeyears. 1 Each of General Motors’ five landfill gas-toenergyprojects, for instance, is improving the company’sbottom line. In fact, GM’s Fort Wayne Truck AssemblyPlant in Indiana saves well over $500,000 per year byusing landfill gas instead of natural gas. 2Georgia-Pacific and other companies in the forestproducts industry combust wood wastes to generate heatand electricity at their processing plants. Using biomassresidues as fuel reduces their energy costs comparedwith that of buying natural gas or electricity from theirretail power suppliers. This is particularly true if theresidues are a by-product of a manufacturing process(e.g., food-processing or wood mill wastes), if theresidues would have incurred a “tipping” fee if dumpedin a landfill, or if they already are being collected nearthe point where they would be used as fuel (therebyreducing transportation costs).In order to lower the cost of their electricity, somecompanies with sufficient land consider installing onsitewind turbines that deliver power directly to theirfacilities. Power from wind turbines located at a corpo-2 CORPORATE GUIDE TO GREEN POWER MARKETS W O R L D R E S O U R C E S I N S T I T U T E


ate facility can sometimes be cost competitive, especiallyif the wind resource is attractive and the companycan avoid utility transmission and distribution charges byhaving the wind power delivered directly to the nearbyfacility. Ford, Michelin, and Pirelli, for instance, haveinstalled several megawatts of wind turbines at corporatefacilities in the United Kingdom.IBM’s energy managers consider greenelectricity to be a hedge against possible priceincreases of fossil fuel–generated power.Stable corporate energy pricesSome companies switch to renewable resources in orderto hedge their energy costs against volatile fossil fuelprices. In 2001, for example, IBM signed a five-yearfixed-price contract with its utility to provide windgeneratedelectricity at IBM operations in Austin, Texas.When the company initially signed up, the greenelectricity was slightly more expensive than the utility’sconventional power. But because the utility periodicallyadjusts its conventional power prices to reflect changesin primary fuel wholesale costs, IBM’s energy managersconsidered the green electricity to be a hedge againstpossible price increases of fossil fuel–generated power.The green electricity helps stabilize the IBM facility’scosts over time, thereby contributing to less volatileearnings quarter after quarter.IBM’s hedge strategy yielded results rather quickly. Asnatural gas prices rose through 2001, conventionalpower prices climbed along with them until they becamemore expensive than the utility’s wind-generatedelectricity. IBM thereafter started to save on its electricitybill. Because natural gas prices have remained high,IBM now expects to save more than $60,000 per yearthrough this contract. 3Solar power, as well, can stabilize corporate electricitycosts. Two Staples distribution centers in California, forexample, host solar photovoltaic (PV) systems on theirrooftops. The PV systems reduce the amount of powerStaples buys from its retail electricity provider duringthe peak (and most expensive) hours of the day. Furthermore,the negotiated price for power is competitive withmarket rates and the fixed-price provides a hedgeagainst retail electricity price increases. 4Renewable energy is more likely to offer corporateenergy users with a hedge value under certain conditions.For electricity, these conditions include:●●●●The wholesale prices of the key primary fuels thatgenerate power (e.g., natural gas but not nuclear)fluctuate relatively frequently.The price changes of primary fuels are passed on toend users and updated frequently (more likely inderegulated electricity markets).The corporate end user is able to sign long-termfixed-price power contracts.The corporation’s retail electricity provider is willingto offer long-term fixed-price green electricity. 5Reduced operating losses caused bypower outagesOn-site renewable energy systems serving as backup orstandby generators can reduce operating costs duringblackouts or grid failures. For many firms, poweroutages can be very expensive owing to idle productionlines, lost data, contaminated processing equipment, orproduct spoilage. Many companies therefore alreadyhave diesel generators in place to serve as backupenergy sources. Switching generator fuels to biodieselcan help firms avoid these operating losses in a mannerthat reduces emissions of greenhouse gases and manyairborne pollutants.IV. REDUCED EMISSIONSAnother business rationale for using renewable energyis to lower the emissions of airborne pollutants and alsogreenhouse gases, which are responsible for climatechange. Renewable energy can help companies inmarkets where these emissions are regulated as well aswhere regulations have not yet been introduced.3 CORPORATE GUIDE TO GREEN POWER MARKETS W O R L D R E S O U R C E S I N S T I T U T E


Reduced regulated emissionsSwitching from using fossil fuels to renewable energycan lower the amount of regulated emissions. Emissionsreductions, however, are often not an end among themselves.Rather, the goal is to improve the corporation’soperating margins. When regulated, emissions effectivelybecome monetized; emitters incur costs in theform of pollution taxes, allowance/permit costs, emissionscontrol equipment expenses, or other mechanisms.Renewable energy can lower these emissions-relatedoperating costs by reducing emissions, a financial impactthat is readily quantifiable.Reduced unregulated emissionsUsing renewable energy also can be an attractiveemissions reduction strategy for corporate facilitieslocated in countries that currently do not regulate CO 2 ,other greenhouse gases, or airborne pollutants. Forexample, many leading firms in the United States,including Alcoa, 3M, and Lockheed Martin, haveestablished voluntary greenhouse gas emissions reductiontargets. Operating under the assumption thatmandatory controls on greenhouse gases might eventuallyemerge in the United States, companies are settingthese targets in order to build the internal capacityrequired for operating in a carbon-constrained world.This strategy reduces a company’s exposure to theoperational and financial risks associated with possiblefuture regulations of greenhouse gas emissions. Inaddition, setting voluntary targets identifies firms asbeing “green” or as proactively addressing the globalchallenge of climate change.The use of renewable energy can be an attractive emissionsreduction strategy for corporate facilities regulatedunder mandatory carbon dioxide (CO 2 ) or greenhouse gascap-and-trade emission allowance systems, such as thoseunder the Kyoto Protocol. For example, a DuPontmanufacturing plant in Uentrop, Germany, convertedfrom using natural gas to biomass for some of its thermalenergy needs. By switching fuels, the facility has decreasedits on-site CO 2 emissions, thereby reducing itsneed to buy CO 2 allowances on the market or to useallowances allocated by the German government.Renewable energy can help firms lower regulatedemissions besides CO 2 . In order to satisfy local airquality regulations, some companies may want to cut theamount of sulfur dioxide (SO 2 ), nitrogen oxides (NO x ),and particulate matter (PM) released from their manufacturingfacilities. For these companies, switching fromfossil fuels to renewable resources may be an attractiveoption. Converting an industrial boiler from using coalto biomass, for example, or co-firing biomass togetherwith coal can reduce a facility’s SO 2 , NO x , and PMemissions. 6Using renewable energy can be an attractiveemissions reduction strategy for corporatefacilities regulated under mandatory CO 2cap-and-trade systems.Many firms are switching to renewable energy to helpthem achieve these voluntary emissions reduction goalsand manage regulatory risk. For example, Staples’greenhouse gas emissions reduction target is motivatingthe company to buy renewable energy certificates(RECs). 7 Likewise, this business rationale is a primarydriver of Johnson & Johnson’s purchase of green electricityand installation of several on-site solar photovoltaicsystems in the United States.V. STRONGER STAKEHOLDERRELATIONSHIPSUsing renewable energy can strengthen a company’srelationships with its various stakeholders, includingcustomers, local communities, employees, and shareholders.CustomersSome companies try to differentiate their brands fromthose of their competitors by being seen as “green” or asenvironmentally responsible corporate citizens. Usinggreen power can help enhance this corporate image orimprove a company’s reputation by demonstrating4 CORPORATE GUIDE TO GREEN POWER MARKETS W O R L D R E S O U R C E S I N S T I T U T E


leadership in environmental performance. This is one ofthe reasons that firms such as FedEx Kinko’s and Staplesuse renewable energy in many of their stores. Likewise,Whole Foods Market purchases RECs to appeal to oneof its main customer segments: environmentally consciousconsumers. WRI’s experience suggests thatcompanies in business-to-consumer industries morecommonly use this business rationale than do companiesin business-to-business sectors.Firms are switching to renewable energy toachieve voluntary emissions reduction goalsand manage regulatory risk.Other firms leverage their use of green power todifferentiate not only corporate brands but also individualproducts. Interface Fabrics Group, for example,uses its purchase of RECs to differentiate its Terratex ®brand of commercial interior fabrics from those of itscompetitors. This strategy appears to be working, as thesales of Terratex ® fabrics have nearly doubled since itlaunched the REC branding initiative. 8 White Wave, themaker of Silk ® soy milk, highlights on its cartons the factthat all the electricity used to manufacture the soy milkis matched by wind-generated RECs.Local communitiesOn-site renewable energy generation systems can establisha company as a responsible neighbor in local communities.For example, Johnson & Johnson installed a 500kilowatt solar PV array in 2003 on the roof of one of itsfacilities in Titusville, New Jersey. The system reduceslocal air pollution by decreasing the amount of fossil fuelgeneratedelectricity that the facility buys from the localutility. The system also gives Johnson & Johnson anopportunity to provide on-site educational tours to localschoolchildren and science classes, further strengtheningthe company’s relationship with the community.EmployeesUsing green power also may enhance a corporation’srelations with its employees, an important audience forAbout This SeriesThis publication is the seventh installment of the CorporateGuide to Green Power Markets series, which is basedon WRI’s experiences with the Green Power MarketDevelopment Group. Previous installments are:1. Introducing Green Power for Corporate Markets:Business Case, Challenges, and Steps Forward2. Opportunities with Landfill Gas3. Corporate Greenhouse Gas Emissions Inventories:Accounting for the Climate Benefits ofGreen Power4. Introducing the Green Power Analysis Tool5. Renewable Energy Certificates: An AttractiveMeans for Corporate Customers to PurchaseRenewable Energy6. Developing “Next Generation” Green PowerProducts for Corporate Markets in NorthAmericaEach of these Corporate Guides can be found atwww.thegreenpowergroup.org/publications.html.corporate management. A recent KPMG survey of 1,600of the world’s largest companies in sixteen industrializedcountries found that approximately half believed thatemployee motivation, and therefore the “war for talent,”was a major driver of corporate social responsibility (CSR)activities. 9 Other commentators, as well, have observedthat many employees want to work for firms that have amission beyond just increasing shareholder value. 10Switching to renewable energy sources can be oneelement of a CSR strategy. Through this strategy, acompany communicates and substantiates corporatevalues that may be important to both current and prospectiveemployees. A commitment to green powertherefore can help make its employees proud of theiremployer and thereby help the company attract highqualityemployees.5 CORPORATE GUIDE TO GREEN POWER MARKETS W O R L D R E S O U R C E S I N S T I T U T E


ShareholdersRenewable energy can help strengthen a company’simage with shareholder activists and some institutionalinvestors. Capital markets have entered an era ofshareholder resolutions regarding climate change, withthe number of climate change resolutions each yearamong U.S. and Canadian companies more than tripling,to thirty-one, between 2001 and 2004. 11Switching to renewable energy is one waya company can signal to both shareholderactivists and institutional investors that it ismanaging climate-related risk.VI. CONCLUSIONSMany corporations are increasing their use of renewableenergy to meet some or all of their energy needs. Thesecompanies are switching to renewables to obtain avariety of business benefits:●●●Lower or stabilized operating costsReduced emissionsStronger stakeholder relationships.Each of these business cases directly or indirectly linksrenewable energy use to better margins and operatingperformance. As a result, opportunities exist for firms toconduct business in an economically and environmentallysustainable manner.Likewise, many institutional investors are becomingincreasingly concerned about companies’ financial andregulatory exposure regarding climate change andcorporate greenhouse gas emissions. The emergence ofthe Carbon Disclosure Project illustrates such investorconcern. 12 Furthermore, some investors perceive strongenvironmental performance as an indication that corporatemanagement has a forward-looking strategy andruns a tight ship. Indeed, several recent studies haveshown a correlation between environmental performanceand financial performance. 13Switching to renewable energy is one way that a companycan signal to both shareholder activists and institutionalinvestors that it is managing its greenhouse gasemissions and, therefore, climate-related risk.Finally, using renewable energy can make a companymore attractive to socially responsible investors (SRI).For instance, after a corporate member of the GreenPower Market Development Group announced that ithad switched 10 percent of its U.S. electric load to greenelectricity in 2003, a major SRI firm increased itsholdings of the company’s stock.6 CORPORATE GUIDE TO GREEN POWER MARKETS W O R L D R E S O U R C E S I N S T I T U T E


ABOUT THE AUTHORCraig Hanson is a Senior Associate with WRI’sClimate, Energy, and Pollution Program.ACKNOWLEDGMENTSThe author is grateful to Sander Daniels and Daniel Leistrafor research conducted for this publication. He thanks ErinKelley of Interface, Jake Swenson of Staples, Dan Usas ofJohnson & Johnson as well as David Jhirad, Jay McAllister,Diana Profir, and Fred Wellington of the World ResourcesInstitute for comments to early drafts. In addition, theauthor is grateful to Hyacinth Billings, Gayle Coolidge,Maggie Powell, and Margaret Yamashita for turning thedraft paper into a finished publication.The author thanks the members of the Green PowerMarket Development Group and all those who havesupported the Group over the past year, including thePew Charitable Trusts, the Oak Foundation, theRockefeller Brothers Fund, the S.C. Johnson Fund, andthe U.S. Environmental Protection Agency.In addition, the author thanks the many renewableenergy providers and project developers with whom theGroup has engaged.The author alone is responsible for the views andperspectives expressed in this publication.NOTES1. Energy Information Agency. 2005. U.S. Natural Gas Prices. U.S.Department of Energy, Washington, DC. Available online at: http://tonto.eia.doe.gov/dnav/ng/xls/ng_pri_sum_dcu_nus_m.xls.Between June 2002 and June 2005, the average price of natural gassold to industrial consumers in the United States increased from$3.86/tcf to $6.78/tcf.2. For more details about GM’s landfill gas-to-energy projects, seeAtcha, S. and V. Van Son. 2002. Opportunities with Landfill Gas.World Resources Institute, Washington, DC.3. For more information about IBM’s long-term fixed-price greenpower contract and about green electricity as a price hedge, seeAulisi, A. and C. Hanson. 2004. Developing “Next Generation”Green Power Products for Corporate Markets in North America.World Resources Institute, Washington, DC.4. For more information, see The Solar Services Model: An InnovativeFinancing Approach to On-site Solar Photovoltaics. Available on-lineat: www.thegreenpowergroup.org/case_studies_Staples_2.pdf.5. For more information about conditions under which green electricitycan serve as a hedge, see Aulisi, A. and C. Hanson. 2004. Developing“Next Generation” Green Power Products for Corporate Markets inNorth America. World Resources Institute, Washington, DC.6. Bain, R. 2002. Biopower Technical Assessment, National RenewableEnergy Laboratory, Golden, CO.7. Staples finances its RECs purchases through money saved fromenergy conservation initiatives. For more information, see ParlayingEnergy Efficiency into Green Power: Staples’ Experience withOptimizing GHG Performance. Available on-line at:www.thegreenpowergroup.org/case_studies.html.8. For more information, see Hanson, C. and V. Van Son. 2003.Renewable Energy Certificates: An Attractive Means for CorporateCustomers to Purchase Renewable Energy. World ResourcesInstitute, Washington, DC.9. KPMG Global Sustainability Services. 2005. KPMG InternationalSurvey of Corporate Responsibility Reporting 2005. KPMG,Amsterdam, The Netherlands. Available online at: http://www.kpmg.com/Rut2000_prod/Documents/9/Survey2005.pdf.10. Friedman, T. The World is Flat: A Brief History of the Twenty-firstCentury. Farrar, Straus & Giroux, New York, 2005.11. Aulisi, A., J. Layke, and S. Putt Del Pino. 2005. A Climate ofInnovation: Northeast Business Action to Reduce Greenhouse Gases.World Resources Institute, Washington, DC.12. For more information about the Carbon Disclosure Project, visithttp://www.cdproject.net.13. For more information, see Innovest Group. 2004. CorporateEnvironmental Governance. Innovest Group, New York, NY.Available online at: http://www.innovestgroup.com/pdfs/2004-11-09-Environmental_Governance.pdf.7 CORPORATE GUIDE TO GREEN POWER MARKETS W O R L D R E S O U R C E S I N S T I T U T E


The World Resources Institute is an environmental think tank that goesbeyond research to create practical ways to protect the Earth and improvepeople’s lives. Our mission is to move human society to live in ways that protectEarth’s environment for current and future generations.Our program meets global challenges by using knowledge to catalyze public andprivate action:●●●●To reverse damage to ecosystems. We protect the capacity of ecosystems tosustain life and prosperity.To expand participation in environmental decisions. We collaborate withpartners worldwide to increase people’s access to information and influenceover decisions about natural resources.To avert dangerous climate change. We promote public and private action toensure a safe climate and sound world economy.To increase prosperity while improving the environment. We challenge theprivate sector to grow by improving environmental and community well-being.In all of its policy research and work with institutions, WRI tries to build bridgesbetween ideas and actions, meshing the insights of scientific research, economicand institutional analyses, and practical experience with the need for open andparticipatory decision making.WRI’s Climate, Energy, and Pollution Program strives toward theachievement of WRI’s climate goal: To protect the global climate system fromfurther harm due to emissions of greenhouse gases and help humanity and thenatural world adapt to unavoidable climate change. WRI believes that cleareconomic and development benefits must accompany measures to slow the use offossil fuels and to manage land use in an environmentally protective manner.8 CORPORATE GUIDE TO GREEN POWER MARKETS W O R L D R E S O U R C E S I N S T I T U T E

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