Don't look now, but corporate America may lead the next phase of the renewable energy revolution. And that's terrible news for utilities across the country.
Companies are looking at renewable energy as a way to save costs, lock in rates, and go green, and they may have more power to upset the utility business model than even a million homeowners installing solar panels. The defection of even a small number of large companies from the traditional grid could cause havoc in the utility industry.
The bottom line is reason 1, 2, and 3
If you look at energy from a company's perspective, there are a lot of advantages to looking into buying your own renewable energy and forgoing the utility's monopoly. Rates for solar energy in sunny states are now $0.05 per kWh, or less -- that is, less than half of what the average commercial customer pays today.
The simple fact of the matter is that utilities have little incentive to provide electricity at lower prices to commercial customers. Their incentive is to build more and more assets and then spread those costs among customers, which they've done for a hundred years.
Then think about the incentives for utilities and customers in the long term. A utility has no ability, or interest, to control commodity costs long-term. If natural gas prices rise, the utility will just pass the cost on to customers, as is its right as a monopoly. But commercial customers want stability and predictability in costs. If they can lock in long-term power purchase agreements from renewable energy, why not lock up the lower cost?
To put the finances of energy choice into perspective, leaving the grid was so valuable for MGM Resorts (NYSE:MGM) that it recently said it will pay $86.9 million to leave NV Energy and buy electricity on its own. Seriously, it's paying nearly $90 million just to cut the cord to the utility. Most customers, like Apple (NASDAQ:AAPL), which is buying energy from third-party plants and building some of its own plants, don't even have to pay fines, so the economics are even better.
If the economics didn't work, commercial customers wouldn't be looking to buy renewable energy today. But it does, and that's the biggest reason commercial customers are looking to go renewable.
The PR boost can't hurt
While economics is the real driver of commercial renewable energy projects, the PR boost can't be bad for companies. They get to call themselves green or say they have a small environmental impact, something companies like Apple, Microsoft, and Amazon have been pushing for years.
It's not clear exactly how this affects consumers' opinions about companies, but it can't hurt to appear green.
Who is winning the commercial energy market?
Unlike utility- or residential-scale solar, I think commercial solar projects will largely be won by a small handful of players. That's because commercial companies want to work with known counterparties with a track record of success building projects on time and on budget.
Two companies that are already winning in this space are First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR). First Solar signed a massive deal to supply Apple's headquarters with solar energy and was behind Switch's agreement to stay with NV Energy in Nevada (the data company was the first that tried to leave the grid). SunPower has built multiple projects for Apple around to world and has a pipeline of over $1 billion in commercial projects. Like First Solar, it's working primarily with larger commercial entities that can provide the scale it needs to make a dent on the income statement.
Recurrent Energy, which is owned by Canadian Solar (NASDAQ:CSIQ), could also be a major player in the solar development side. The company has shown the ability to win competitive bids for utility-scale projects in North America and could develop projects that are competitive for commercial buyers. And NextEra Energy (NYSE:NEE) could be interesting to watch from the power producer side. It could offer a bigger suite of energy-generating options for commercial customers and has started to develop its own renewable energy projects as well.
However the commercial renewable energy market plays out, we know that companies have an appetite to buy more renewable energy and are willing to cut ties to the grid to get it. That's great news for renewable companies and terrifying for utilities, which are already struggling with slow demand growth and rising costs. If commercial customers start to leave the grid en masse, it'll only raise costs further, causing more defections. That's something investors should keep in mind as they decide where to put energy investments in the future.