Friday, July 23, 2010

Does Google know something about energy that the rest of us don't?

Dave Rochlin - www.climatepath.org

Google announced a large wind energy deal this week that reveals a lot about where they think energy markets are headed. Other big energy consumers should take notice.

Rather than simply buying renewable energy credits (RECs) and adding some solar panels to show their commitment to green, Google’s energy subsidiary signed a 20-year power purchase agreement with NextEra Energy. Google will begin buying 114 megawatts of electricity from an Iowa wind farm later this summer. Now of course Google doesn’t consume much of their energy anywhere near Iowa, but they can (and intend to) sell this energy on wholesale markets, and simultaneously buy energy where they do use it.

By buying the wind energy directly, Google has created a giant hedge against both rising energy prices and the future cost of compliance with emissions reduction mandates – either voluntary or mandatory. RECs are a way to separate out the actual energy from the credit for low emissions, and this direct investment locks in their costs for both.

Why would they want to do this? Aside from their intention on greening their operations, they believe it makes good business sense.

On the energy side, world demand keeps increasing. China recently overtook the US in total energy use according to the International Energy Agency, and India is poised to become a large importer of coal to meet their growing demand. While there is much debate about whether and when we’ll start to deplete fossil fuel reserves, it’s clear that higher demand and higher costs associated with the extracting future reserves (think of BP drilling a mile underwater for oil) will send energy prices upwards. And demand-wise, plug-in electric cars could undo some of the other energy savings that are slowing electricity use in the U.S.

On the renewables side, while the cost of solar, wind and other ‘clean’ sources will continue to fall and capacity continue to increase, a climate bill in the US could create a shortfall, sending the price of ‘clean energy’ (or at least the REC piece) up. With the senate climate bill stalled, and both carbon offset and REC markets showing weak demand, this may seem hard to imagine today. But in a few years, it could be quite a different story.

A group called NERA Economic Consulting has partnered with a very cool startup called Crowdcast to try and predict how this will all play out. They use ‘the wisdom of crowds' to come up with a consensus forecast, which Crowdcast claims is typically more reliable than individual expertise. Half 'the crowd' thinks we’ll have a senate bill by June of 2012, that it will require a 17% reduction in emissions, and that the price per ton of carbon credits (which can be used to make up for missed reduction targets) will rise above $10.

Google will be immune to both overall energy and emissions targets, and in fact might be in a position to sell their excess green energy for quite a tidy profit. My bet is that by 2020, Google will be – as usual – laughing all the way to the bank.

As they say “Through the long term purchase of renewable energy at a predetermined price, we’re partially protecting ourselves against future increases in power prices. This is a case where buying green makes business sense.”

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Photo: CC License via Flickr: Yodel Anecdotal

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