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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Tech Giants Opt For Renewables On Cost, Not Just Good PR

Recently Google announced plans to triple the amount of renewable energy that it purchases over the next decade. The announcement was interesting for two reasons – first, for the lack of a stir it caused, and second, for the rationale detailed in the announcement.

This announcement is only one of a string of green energy oriented initiatives Google has taken on in recent years, but the truth of the matter is that the firm is not alone. Shareholders are not protesting Google’s plans because such initiatives are very much in vogue among tech companies, and as result the broader public responded to the latest initiative with a collective yawn. Related: Could WTI Trade At A Premium To Brent By Next Year?

While a decade ago clean energy was expensive enough and novel enough that it needed U.S. government support in the form of tax incentives and a full-blown PR push, these days solar energy is competitive with traditional grid power in many places. Not only that, but as commercial and retail electricity costs rise, companies have responded by wringing out every bit of energy efficiency they can throughout the business.

Google’s recent announcement indicated that the company gets 3.5 times the amount of computing power out of a data center for the same amount of electricity versus five years ago. Given that the firm’s business revolves around these data centers, this type of efficiency is a major cost benefit. So Google’s efforts to lower energy use and promote cheaper energy make business sense. Related: Low Oil Prices Make This Stock A Good Long-Term Bet

But the significant part of this type of announcement is just how ordinary it is. Tech giant Facebook has also invested in renewable energy initiatives, and executives from non-tech firms like Walmart and Gap are personally involved in clean energy investing. There are vast amounts of money pouring into renewable energy overall, but a lot that funding is related to business and making a profit rather than pursuing a social ideal. And that is exactly why investors are not raising a fuss about these types of investments. Investing on the basis of social ideals is not a particularly effective technique.

For evidence of the changing winds in energy, investors need look no further than the separate massive clean energy deals announced by Google and Apple earlier this year. These deals are having a major impact on wholesale power prices in some regions of the country. Conventional wholesale energy is trading for around $0.03 a kwh, in part due to the enormous amount of natural gas being generated by fracking. Related: Global Oil Supply More Fragile Than You Think

The persistently low wholesale price has hurt many utility companies that focused on that market such as giant Exelon (EXC). Exelon and other utilities faced with high fixed cost plants including nuclear operations, count on wholesale power markets for a considerable portion of revenues.

Corporate giants like Google and Apple have added to electricity supplies by building dedicated green energy installations, which offset their own demand. The installations have become more economically viable as their cost has fallen by half or more to put green energy generation costs roughly in-line with conventional generation.

By Michael McDonald for Oilprice.com

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  • Ron Wagner on August 08 2015 said:
    No the priced is nowhere near that of natural gas powered electrical generation. Europe is paying two to three times what we are, and we must avoid their foolishness.
  • Gord Tulk on August 09 2015 said:
    The author says that their costs are competitive with NG and other conventional sources yet offers no evidence.

    Shareholders in Google et al could care less about "green" energy investments as energy costs are a tiny fraction of revenues. The PR value likely is worth more than the loss versus conventional power.

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